Travis International has a one-time expense of $1.13 million that must be paid two years from today. The firm can earn 4.3 percent, compounded monthly, on its savings. How much must the firm save each month to fund this expense if the firm starts investing equal amounts each month starting at the end of this month?

Question

Quizplus · Accepted Answer

To calculate the monthly savings needed, we can use the formula for present value of an annuity:

PMT = PV / [(1 - (1 + r)^(-n)) / r]

Where:
PMT = monthly savings
PV = present value of the expense
r = monthly interest rate (4.3% / 12 = 0.3583%)
n = number of periods (24 months)

Plugging in the values:

PMT = 1,130,000 / [(1 - (1 + 0.003583)^(-24)) / 0.003583] = $45,172.02

Therefore, Travis International needs to save $45,172.02 every month starting at the end of this month to fund the one-time expense of $1.13 million that must be paid two years from today. The best choice is B.

Travis International Has a One-Time Expense of $1