Question

Fastenings Co. produces metal rivets and anticipates purchasing additional machines to build its operations over the next four years. The costs for each of the next four years are given below. Year Cost 1 $75,000 2 $48,000 $120,000 $180,000 Fastenings Co. currently has a cash surplus and would like to set aside money to ensure that it can purchase these machines. Assuming that the money is placed into a savings account that earns 3% interest compounded annually, how much should Fastenings Co. set aside now to ensure it can cover the cost of the machines it would like to purchase? Create an .xls file to solve OR capture an image of your "by hand work and upload here

Answer 1

Ans:

The amount to be set aside = $387,729

Explanation

The amount to be set aside now is the present value of the cost of the machines.

Present value = cash flow * 1 / (1+i)^1 + cash flow * 1 / (1+i)^2 + cash flow * 1 / (1+i)^3 + ………….cash flow * 1 / (1+i)^n

                        = $75,000 * 1/(1+0.03)^1 + $48,000 * 1/(1+0.03)^2 + $120,000 * 1/(1+0.03)^3 + $180,000 * 1/(1+0.03)^4

                        = $75,000 * 0.971 + $48,000 * 0.943 + $120,000 * 0.915 + $180,000 * 0.888

                        = $72,825 + $45,264 + $109,800 + $159,840

                        = $387,729