Question

How much money can a production company that makes fluidized bed scrubbers spend now instead of spending $110,000 in year 5 if the interest rates are estimated to be 7% per year in years 1 to 3 and 16% per year in years 4 and 5? The company can spend_______________

Answer 1

The production company can spend $65,022.33 now instead of $110,000 in five years considering the given interest rates of 7% for the first three years and 16% for the last two.

Step-by-step explanation:

The production company can spend $65,022.33 now instead of spending $110,000 in year 5 given the interest rates of 7% for the first three years and 16% for the last two years. To calculate this, we utilize the concept of present value which discounts future payments based on the expected interest rates. The formula used is:

PV = FV / ((1 + i1)^(n1) * (1 + i2)^(n2))

Where PV is the present value, FV is the future value ($110,000), i1 is the interest rate for the first period (7% or 0.07), n1 is the number of years at i1 (3 years), i2 is the interest rate for the second period (16% or 0.16), and n2 is the number of years at i2 (2 years). Plugging these values into the formula gives us:

PV = 110,000 / ((1 + 0.07)^3 * (1 + 0.16)^2) = $65,022.33