Winston Enterprises would like to buy some additional land and build a new factory. The anticipated total cost is $136 million. The owner of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire expansion project. Management has decided to save $450,000 a month for this purpose. The firm earns 6% compounded monthly on the funds it saves. How long does the company have to wait before expanding its operations?

Question

Quizplus · Accepted Answer

The correct answer is A.The formula for the future value of an annuity is:FV = PMT * (((1 + r)^n - 1) / r)where:PMT is the monthly paymentr is the monthly interest raten is the number of monthsIn this case, we have:PMT = $450,000r = 6% / 12 = 0.5%FV = $136 million = $136,000,000Solving for n, we get:n = 184.61 months

Winston Enterprises Would Like to Buy Some Additional Land and Build