Question

A planned expansion will require Holton Corp. to make a $1,200,000 payment to a contractor in 9 months from now. If Holton can earn 4.8% compounded quarterly on its investments, how much would need to be invested today in order to have the required amount in 9 months? (Round your final answer to 2 decimal places.)

Answer 1

Required Amount after 9 months, Future Value = $1,200,000

Interest rate = 4.8%

Quarterly Interest rate, i = 4.8 * 3/12 = 1.2% = 0.012

Let Amount to be invested today, Present Value = x

Period of investment = 9 months

Number of months in a quarter = 3 months

Number of compoundings, n = 9 / 3 = 3

Present Value * (1 + i)ⁿ = Future Value

x * (1+0.012)³ = $1,200,000

x * 1.036433728 = $1,200,000

x = $1,200,000 / 1.036433728

x = $1,157,816.43

Amount to be invested = $1,157,816.43