Question

Adirondack Corporation will need $1.75 million 3 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 2.75 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase?

$1,412,308.18
$1,613,216.13
1,798,407.21
$1,876,306.49
$1,350,868.47

Answer 1

To have $1.75 million in 3 years in an account with an annual compound interest rate of 2.75%, Adirondack Corporation must deposit $1,613,216.13 today.

Step-by-step explanation:

The question pertains to determining the present value of a future sum using the formula for compound interest. Adirondack Corporation needs to find out how much money should be deposited today in an account that pays a 2.75 percent interest, compounded annually, to have $1.75 million in 3 years. The formula to be used is: Present Value (PV) = Future Value (FV) / (1 + interest rate)^number of periods.

By inserting the numbers into the formula, we get PV = $1,750,000 / (1 + 0.0275)^3. After doing the math, we find that the present value, or the amount the company must deposit today, is $1,613,216.13.