Question

Pollution control equipment for a pulverized coal cyclone furnace is estimated to cost $190,000 two years from now and an additional $120,000 four years from now. If Monongahela Power wants to set aside enough money now to cover these future costs, how much must be invested at an interest rate of 8% per year, compounded semiannually

Answer 1

Answer: $250,096

Step-by-step explanation:

To find out the amount that should be invested today, one should find the present values of both figures and add them up:

Interest rate should be periodically adjusted so: 8% / 2 = 4% per semi annum

No of periods should be adjusted as well.

Amount to be invested today:

`= (190,000)/((1 + 0.04)^(2 * 2 periods) ) + (120,000)/((1 + 0.04)^(4 * 2 periods) )\\\\= (190,000)/((1 + 0.04)^(4) ) + (120,000)/((1 + 0.04)^(8) )\\\\= 250,095.62`

= $250,096