Question

Your company is about to increase its production capacities therefore it is going to invest into new manufacturing equipment 3 years from now. The price of these equipment is going to be 30 million $ 3 years from now. Your company finances this purchase by saving a given amount of money on its saving account at the end of each month for 3 years. The interest rate is 12%. How much money should be saved at the end of each month?

Answer 1

P/r[(1+r)n - 1] = F

P = annual cash flow

r = interest rate = 0.12/12 

                            = 0.01

 

n = No of period = 3* 12 

                               = 36

 

F = Future value of annual cash flows = Price at the end of 3 years 

                                                                   = $30 million

P/0.01[(1+0.01)36 - 1] = $30 million

 

P[1.0136 - 1] = $30 million*0.01 

                        = $300,000

 

P[1.43077 - 1] = $300,000

P * 0.43077 = $300,000

P = $300,000/ 0.43077 

    = $696429.29

 

Hence, money to be saved at the end of each month is $696429.29.

Hence, money to be saved at the end of each month is $696429.29.