A company plans on purchasing a new piece of equipment in six years. The equipment is expected to cost $200,000. In planning for this purchase, the company will deposit an amount of money into an investment account earning 8% compounded annually. Using an 8% interest rate, the implied annual interest is $200,000 x 0.08 = $16,000. The following information is given: Assuming an annual interest rate of 8% for six years is appropriate, the present value of the deposit is $200,000 x 0.63017 = $126,034. Assuming an annual interest rate of 8% for eight years is appropriate, the present value of the deposit is $200,000 x 0.54027 = $108,054. Assuming an annual interest rate of 6% for eight years is appropriate, the present value of the deposit is $200,000 x 0.62741 = $125,482. How much does this company need to deposit today?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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A company plans on purchasing a new piece of equipment in six years. The equipment is expected to cost $200,000. In planning for this purchase, the company will deposit an amount of money into an investment account earning 8% compounded annually. Using an 8% interest rate, the implied annual interest is $200,000 x 0.08 = $16,000.

The following information is given:

  • Assuming an annual interest rate of 8% for six years is appropriate, the present value of the deposit is $200,000 x 0.63017 = $126,034.
  • Assuming an annual interest rate of 8% for eight years is appropriate, the present value of the deposit is $200,000 x 0.54027 = $108,054.
  • Assuming an annual interest rate of 6% for eight years is appropriate, the present value of the deposit is $200,000 x 0.62741 = $125,482.

How much does this company need to deposit today?

  • $108,054
  • $126,034
  • $125,482
  • $104,000
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