Question

A​ 12-cylinder heavy-duty diesel engine will have a guaranteed residual value of​ $1,000 in five years. Today​ (year 0) the equivalent worth of this engine is how much if the interest rate is​ 9% per​ year?

Answer 1

$650

Step-by-step explanation:

Guaranteed Residual Value = FV = $1,000

Interest rate = r = 9% = 0.09

Number of years = n = 5 years

Using Following formula we can calculate today's worth of the engine.

Residual value after 5 years = Today's value x ( 1 + rate of interest )^number of years

FV = PV x ( 1 + r )^n

$1,000 = PV x ( 1 + 0.09 )^5

PV = $1,000 / ( 1.09 )^5

PV = $649.93

PV = $650 (rounded off to the nearest whole number)