Question

A company would like to invest in a capital budget project that will be worth $500,000 in 40 years. How much should this company invest today, assuming an average inflation rate of 2% and a 10% annual return

Answer 1

To find out how much the company should invest today, we need to calculate the present value of the future cash flow. Given that the future value is $500,000 in 40 years and the interest rate is 10%, the present value is approximately $39,877.63.

Step-by-step explanation:

To find out how much the company should invest today, we need to calculate the present value of the future cash flow. Using the formula for present value, we can determine the amount.:

Present Value = Future Value /
`(1 + interest rate)^(number of periods)`

Given that the future value is $500,000 in 40 years and the interest rate is 10%, we can calculate the present value as follows:

Present Value = $500,000 /
`(1 + 0.10)^(40)` = $39,877.63

Therefore, the company should invest approximately $39,877.63 today to have a future value of $500,000 in 40 years.

Answer 2

Company needs to invest amount = $23000

Step-by-step explanation:

Below is the calculation of the present value:

Given the future value, FV = $500000

Number of years, n = 40 years

Real interest rate = 10% - 2% = 8%

Present value = ?

Present value = FV (P/F, r, n)

Present value = $500000 (P/F, 8%, 40)

Present value = $500000 (0.046)

Present value = $23000

Company needs to invest amount = $23000