Question

Green Industries is a manufacturer of environmentally friendly household cleaners. Its business has been booming and it would like to save some money for a possible future expansion of its operating facilities. Please answer the questions below to help Green decide which savings plan makes the most sense for its business.

The following time value of money factors may be useful:

Present Value Factors
PV of a single sum for 6 periods at 8% = 0.63017 PV of an annuity for 6 periods at 8% = 6.20979

Future Value Factors
FV of a single sum for 6 periods at 8% = 1.58687 FV of an annuity for 6 periods at 8% = 7.33592

Question 1:
If Green wants to have $680,000 in 6 years, how much money would it need to save today if it could earn an 8% rate of return compounded annually? Round your answer to the nearest whole dollar. Include appropriate commas and no dollar signs (e.g. 1,000).

Question 2:
If Green is able to save $78,000 per year for the next 6 years, how much money would it have if it is able to earn an 8% rate of return compounded annually? Round your answer to the nearest whole dollar. Include appropriate commas and no dollar signs (e.g. 1,000).

How much of that is the interest that Green earned on its savings? Round your answer to the nearest whole dollar. Include appropriate commas and no dollar signs (e.g. 1,000).

Question 3:
If Green saves $330,000 today and makes no additional payments, how much money would it have in 6 years assuming it could earn an 8% rate of return compounded annually? Round your answer to the nearest whole dollar. Include appropriate commas and no dollar signs (e.g. 1,000).

Answer 1

QUESTION 1

FV = PV*((1+rate of return)^n)

$680,000 = PV(1.08^6)

$428,515.35 = PV

$428,515.35 is needed to be saved today.

QUESTION 2

We will use a BA 2 plus financial calculator to calculate the future value of the savings-

N = 6

PMT = $78,000

I/Y= 8%

CMPT FV

Future value of the savings or the money he would have after 6 years= $572,202.5

Interest that Green earned on its savings= $572,202.5 - ($78,000*6) = $104,202.5

QUESTION 3

FV = $330,000*(1.08^6) = $523,668.52

Green will have $523,668.52 in 6 years.