151k views
1 vote
How much money needs to be set aside today to purchase a new piece of equipment in 3 yrs? The money is expected to 9% interest compounded annually and the piece of equipemt is expected to increase by 3% per year. The present cost of the equipment is $75,000.00.

User Oivindth
by
8.2k points

1 Answer

7 votes

To calculate the amount of money that needs to be set aside today to purchase a new piece of equipment in 3 years, we need to find the future value of the equipment and calculate the present value of that future amount.

First, let's find the future value of the equipment:

The cost of the equipment is expected to increase by 3% per year, so after 3 years the cost will be:

$75,000 * (1 + 0.03)^3 = $78,225

Next, let's find the present value of that future amount:

The money is expected to earn 9% interest compounded annually, so to find the present value, we need to discount the future amount by the interest rate. We can use the formula:

PV = FV / (1 + r)^t

where PV is the present value, FV is the future value, r is the interest rate, and t is the number of years.

Plugging in the values, we get:

PV = $78,225 / (1 + 0.09)^3 = $73,232.57

So, to purchase the equipment in 3 years, we need to set aside $73,232.57 today.

User Bindi
by
8.1k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories