1. Determine the present worth of a contract that has a cost of $30,000 in year

Question

1. Determine the present worth of a contract that has a cost of $30,000 in year I and annual increases of 6% per year for 10 years. Use an interest rate of 6% per year.

2. If the value of an investment increased from $170,000 to $813,000 over a 15-year period, where no additional deposits were made to the investment account during that period, what annual rate of return was earned?

3. A company wants to have $600,000 in the bank before it invests in new equipment. If the company sets aside $80,000 per year in an account that increases in value at a rate of 15% per year, how many years will it be before the company can purchase new equipment?

Explanation / Answer

1) PV = 30,000/1.06 + 30,000*1.06/1.06^2 + 30,000*1.06^2/1.06^3 +......30,000*1.06^9/1.06^10

PV = $283,018.87

2) (1+r)^15 = 813000/170000

r = 10.99 % = 11 %

3) 80,000*1.15^t + 80,000*1.15^(t-1) +.....

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