Question

XYZ needs $86,499 to purchase new equipment in 5 years. If the opportunity cost (interest rate) is10% how much should XYZ set aside today?

Answer 1

The simple interest formula for a future quantity is the following:

`A=P(1+rt)`

Where:

`\begin{gathered} P=\text{present value} \\ r=\text{interest rate} \\ t=\text{time} \end{gathered}`

Solving for the present value we get:

`P=(A)/(1+rt)`

Replacing the given values:

`P=(86499)/(1+(0.1)(5))`

Solving the operations:

`P=57666`

Therefore, she needs $57666