Question

A small business has determined that the machinery they currently use will wear out in 16 years. To replace the new machine when it wears out, the company wants to establish a savings account today. If the interest rate on the account is 1.6 percent compounded quarterly and the cost of the machinery will be $280,000, how much will the company have to deposit today?

Answer 1

Present value deposit today = 216,886 (Approx)

Step-by-step explanation:

Given:

Number of year (n) = 16 years x 4 quarter = 64

Rate of interest (r) = 1.6% = 0.016 / 4 = 0.004

Future value = $280,000

Present value = ?

Computation of present value deposit today:

`Present\ value = (Future\ value)/((1+r)^n)\\\\Present\ value = (280,000)/((1+0.004)^(64))\\\\Present\ value = (280,000)/(1.291)\\\\Present\ value = 216,886.135`

Present value deposit today = 216,886 (Approx)