Question

Alpha Industries has been having some difficulties on their production line. They anticipate they may need to make repairs for their product in the near future. Their account specialist estimates they should anticipate paying $94120 per year, beginning at the end of year 4 for 4 years. How much should Alpha set aside today in a bank account paying 5% interest compounded annually to cover all of the future repair costs?

Answer 1

Solution:

It is given that the payment of $94120 will be made for 4 years and the interest rate is 5%. With the help of PV of annuity formula, we can calculate the amount that will be required at the end of year 3 to make this payment.

This will be the present value at the end of year 3

We can calculate the present value at year 0 by discounting the PV3

Hence Alpha should keep $288,301.40 aside today to make the required payment