In three years time, the Company estimates that they will need $10 million to build and equip a new plant. To achieve this target amount with a one-time investment today, how much cash would the company have to invest if the return is 12% compounded annually?

Question

Quizplus · Accepted Answer

To find the present value of a future sum, the formula is $PV = \frac{FV}{(1 + r)^n}$, where PV is the present value, FV is the future value ($10 million), r is the annual interest rate (12% or 0.12), and n is the number of years (3). Plugging in the values, we get $PV = \frac{10,000,000}{(1 + 0.12)^3} = \frac{10,000,000}{1.404928} = \$7,118,000$.

In Three Years Time, the Company Estimates That They Will