How much money must you deposit into a savings account today if you desire to pu

Question

How much money must you deposit into a savings account today if you desire to purchase a piece of equipment in 5 years. The equipment costs $1000 today, and is expected to increase in price due to inflation at a rate of 1% per year. Your savings account has an interest rate of 6%, compounded bi-annually. Show your work on your worksheet. Enter in the value rounded to the nearest $1 with the following formal $XXXX How much will the equipment cost in 5 years? How much needs to be deposited today to save up enough to purchase the equipment?

Explanation / Answer

A)Cost of Equipment after 5 years

=1,000 x (1.01)5

=1,000 x 1.051

=$1,051

B)

A=P(1+r)n

r= rate of interest =6% or 0.06 i.e. 0.03 semi annually

n= no of periods = 2 x 5 years=10

A= Amount of Equipment in 5 years=$1,051

P=Principal to be deposited=?

$1,051= P(1+0.03)10

$1,051= P(1.06)10

$1,051=1.343916 P

P=$1,051/1.343916

P=$782

Answer:

A)The equipment will cost $ 1,051 in 5 years.

B)Today needs to deposit $ 782 to save up enough to purchase the equipment.

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