1. Wilson Technology, a growing machine shop, wishes to set aside money now to i
ID: 1133190 • Letter: 1
Question
1. Wilson Technology, a growing machine shop, wishes to set aside money now to invest over the next four years in automating its customer service department. The company can earn 10% on a lump sum deposited now, and it wishes to withdraw the money in the following increments: Year 1: $25,000, to purchase a computer and database software designed for cus- tomer service use; Year 2: $3,000, to purchase additional hardware to accommodate anticipated growth in use of the system; - Year 3: No expenses; and Year 4: $5,000, to purchase software upgrades How much money must be deposited now to cover the anticipated payments over the next 4 years?Explanation / Answer
Year
Cash Flow
01
$25,000 to purchase computer & database software
02
$3,000 to purchase additional hardware
03
No expenses
04
$5,000 to purchase software upgrades
At an interest rate of 10% how much money should be deposited now to cover the future payments?
Calculating the PW of all the future cash outflows
PW = $25,000 (1+.10)-1 + $3,000 (1+.10)-2 + 0 + $5,000 (1+.10)-4
PW = $28,621.68 or rounding off to nearest is $28,622
At an interest rate of 10% the company should be deposit $28,622 now to cover the future payments.
Year
Cash Flow
01
$25,000 to purchase computer & database software
02
$3,000 to purchase additional hardware
03
No expenses
04
$5,000 to purchase software upgrades
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