Question

1. Present Value of $ 1 at 12% for 8 years = 0.404

   Present Value of an annuity at 12% for 8 years = 4.968

   Future Value of $1 at 12% for 8 years = 2.476

   Future Value of an annuity at 12% for 8 years = 12.3

   Vargas Products has settled a lawsuit for patent infringement. They will receive $60,000 per year for the next 8 years. They intend to put that money aside for a large R & D investment. Assuming an investment rate of 12% what will the amount they will have to invest 8 years from now?

   	a.	738,000
   	b.	$193,192
   	c.	$397,500
   	d.	$480,000

Answer 1

In order to compute the amount of investment 8 years from now, we need to compute the future value of an annuity as the company will invest the entire amount at the end of 8 years. In the given case company is getting $60,000 every year for the next 8 years so, we will compute the amount that the company will have at the end of 8 years.

Future value of annuity = Amount which company gets every year X Future value of an annuity at 12% for 8 years

=$60,000 X 12.3

=$738,000

So, the company will have $738,000 at the end of 8 years and the same amount will be invested 8 years from now as it's given that the company put the same amount for investment.

a. $738,000 is a correct option on the basis of above calculations

b.$193,192 is incorrect as it's lesser than $738,000

c.$397,500 is incorrect as it's lesser than $738,000

d.$480,000 is computed wrongly by simply multiplying $60,000 (amount which company gets every year) with 8 years so, this option is incorrect