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:

$P=\frac{A}{1+rt}$

Replacing the given values:

$P=\frac{86499}{1+(0.1)(5)}$

Solving the operations:

$P=57666$

Therefore, she needs $57666