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An agricultural corporation that paid 53% in income tax wanted to build a grain elevator designed to last twenty-five (25) years at a cost of $80,000 with no salvage value. Annual income generated would be $22,500 and annual expenditures were to be $12,000.
Answer the question using a straight line depreciation and a 10% interest rate.
If $100,000 is needed to purchase a piece of equipment 3 years from now, how much money needs to be invested today assuming a 10% rate of return (rounded to the nearest thousand)?
To determine how much money needs to be invested today to reach $100,000 in 3 years with a 10% rate of return, you use the present value formula:
PV=FV(1+i)nPV = frac{FV}{(1 + i)^n}PV=(1+i)nFV
Where:
PVPVPV is the present value
FVFVFV is the future value ($100,000)
iii is the interest rate (10% or 0.10)
nnn is the number of periods (3 years)
PV=100,000(1+0.10)3=100,0001.33175,131PV = frac{100,000}{(1 + 0.10)^3} = frac{100,000}{1.331} approx 75,131PV=(1+0.10)3100,000=1.331100,00075,131