Jimbo Construction, Inc. would like to purchase a (new) D6 Caterpillar Bulldozer

Question

Jimbo Construction, Inc. would like to purchase a (new) D6 Caterpillar Bulldozer in 5 years for $635,000. How much would they have to invest today at an annual interest rate 9.2% to make this purchase 5 years into the future? a. What is the number of time periods (n) you should use in solving this problem? b. What rate of interest (i), per period of time, should be used in solving this problem? c. Is the present single amount of money (P) known? (Yes, No) d. Which time value factor should be used to solve this problem? e. What is the total amount that must be invested today (15 points)?

Explanation / Answer

(a) n = Number of years (compounding periods) = 5

(b) i = Annual interest rate = 9.2%

(c) No

(d) The P/F time value factor should be used.

(e) Today's investment ($) = 635,000 x P/F(9.2%, 5) = 635,000 x (1.092)-5** = 635,000 x 0.6440

= 408,940

**P/F(i%, N) = (1 + i)-N

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