Question

A company has a liability of $100,000 due in 8 years. The cost of capital is 6 percent per year. What amount of money do you need to set aside at the beginning of each month for the next 8 years to meet this liability? Use the appropriate financial function to solve this problem.

Answer 1

To meet a liability of $100,000 due in 8 years, one needs to set aside approximately $1,107.61 at the beginning of each month.

Step-by-step explanation:

To calculate the amount of money that needs to be set aside at the beginning of each month to meet the liability of $100,000 due in 8 years, we can use the formula for the present value of an annuity. The formula is:

PV = P [ (1 - (1 + r)^-n) / r ]

Where:

• PV is the present value of the annuity
• P is the payment amount
• r is the interest rate per period
• n is the total number of periods

In this case, the payment amount is unknown, the interest rate is 6% per year, and the total number of periods is 8 years. We need to solve for P. Plugging in the values, we have:

PV = P [ (1 - (1 + 0.06)^-8) / 0.06 ] = 100,000

Solving for P, we find that the amount of money to be set aside at the beginning of each month is approximately $1,107.61.