Final answer:
To have $1,000,000 in four years with a monthly interest rate of 1%, the metal plating company must set aside approximately $711,800 now. They can calculate this using the present value formula, which is factoring in compound interest over the given period.
Step-by-step explanation:
When a metal plating company wants to set aside money for a future lawsuit, they can use the concept of compound interest to determine the present value of the desired future amount. In this scenario, the company wants to have $1,000,000 available in four years, and the account earns 1% per month. To find out how much they need to set aside now, we use the present value formula which considers the monthly interest rate and the number of compounding periods.
The formula to calculate the present value (PV) is:
PV = FV / (1 + r)^n
where FV is the future value, r is the monthly interest rate, and n is the number of compounding periods.
Here, FV = $1,000,000, r = 0.01 (or 1% expressed as a decimal), and n = 4 years * 12 months/year = 48 months.
So, the calculation is:
PV = $1,000,000 / (1 + 0.01)^48
PV = $1,000,000 / (1.01)^48
By computing this, we find that the company must set aside approximately $711,800 now in order to have $1,000,000 in four years if the account continues to earn 1% interest per month.