See back page for equations. Drezden Company will need new equipment in three ye

Question

See back page for equations. Drezden Company will need new equipment in three years. The equipment will cost $400,000. What lump sum will Drezden have to invest today at 4% rate of return to have S400.000 available in three years? The Atlantic Medical Clinic can purchase a new computer system that will save $9,000 annually in billing costs. The computer system will last for eight years and have no salvage value. What is the maximum Atlantic can spend on this computer system if the clinic's required rate of return is 11%?

Explanation / Answer

1. Taking the formula = (1/(1+i)n) = Amount to be invested today to purchase new equipment will be:-

= $4,00,000*(1/(1+.04)3

= $3,55,598.

2. Using Formula :- Maximum amount that can be invested = A * (1 - (1/(1+i)n) / i }

= $9000 * (1-(1/1.1)8 / .11)

=$46,315

  

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