Question

Show cash flow diagram if applicable. A company that manufactures regenerative thermal oxidizers made an investment 10 years ago that is now worth $1,300,000. Calculate the amount of the initial investment (P) if the interest rate was:

a) 15% per year simple interest

b) 15% per year compound interest

Answer 1

value today after 10 years = 1300000

a) 15% per year simple interest

We need to find initial investment, Let initial investment be P

Then Interest is given by formula = P*R*T

This interest plus initial amount P is equal to the value given here

so, P+PRT = 1300000

P+P*0.15* 10 = 1300000

P (1+1.5) = 1300000

P = 1300000/2.5 = 520000

This is the initial investment in case of simple interest of 15%

b) 15% compounded annually

Here we use formula F=P*(1+r)^t

F= 1300000, r= 0.15, t=10yrs

Putting values into the equation

1300000 = P*(1+0.15)^10

P = 1300000/1.15^10 = 321340.12

This is the investment in case of compound interest