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7 December, 12:07

A small business has determined that the machinery they currently use will wear out in 16 years. To replace the new machine when it wears out, the company wants to establish a savings account today. If the interest rate on the account is 1.9 percent per quarter and the cost of the machinery will be $325,000, how much will the company have to deposit today

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  1. 7 December, 15:07
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    The initial deposit should be of: $97,439.62

    Explanation:

    Giving the following information:

    To replace the new machine when it wears out, the company wants to establish a savings account today. The interest rate on the account is 1.9 percent per quarter and the cost of the machinery is $325,000.

    To calculate the initial investment required, we need to use a variation on the simple interest future value formula:

    FV = PV * (1+i) ^n

    PV = present value

    Isolating PV:

    PV = FV / (1+i) ^n

    i = 0.019

    n = 4*16 = 64

    FV = 325,000

    PV = 325,000 / (1.019^64) = $97,439.62
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