Question

Atlas Transportation is considering installing temperature logger in all its refrigerated trucks for monitoring temperatures during transit. If the systems will reduce insurance claims by $40,000 per year for 5 years how much should the company be willing to spend now if it uses an interest rate of 12% compounded quarterly

Answer 1

$144191.05

Step-by-step explanation:

Solution

Recall that:

The insurance claim reduction is =$40,000

The time = 5 years

The interest rate = 5%

Now,

We find how much the company be willing to spend if it uses an interest rate of 12% compounded quarterly.

The present value is computed as follows:

The Present Value of the saving (PV) = 40000/(1+12%) + 40000/(1+12%)2 +40000/(1+12%)3 +40000/(1+12%)4 +40000/(1+12%)5

= $144191.05

Hence, the maximum amount the company should be freely spend is

= $144191.05