Question

Demco Products, a company that manufactures stainless steel control valves, has a fund for equipment replacement that contains $500,000. The company plans to spend $85,000 each year on new equipment.

Required:
Estimate the number of years it will take to reduce the fund to zero at an interest rate of 9% per year.

Answer 1

The answer is 20.5 years.

Step-by-step explanation:

If we assume that there is compound interest, we can calculate the increase of the spending on equipment with an annual interest of 9% which results in the $476,374 of the $500,000 being spend on equipment in the 20th year and $519,248 being spend in the 21st year. So between the year 20 and 21, the equipment funding will be reduced to zero.

I hope this answer helps.