Morris Industries would like to purchase some new equipment costing $1.56 million. This purchase is scheduled for 3 years from today. The company earns 3.8 percent compounded monthly on its savings. How much does the company need to save monthly, starting today, if it wants to pay cash to buy this equipment? a. $40,849b. $45,456c. $48,244d. $51,008

The correct answer is A.

Explanation:

Giving the following information:

Final value = 1,560,000

n = 3*12 = 36 months

i = 0.038/12 = 0.0031667

To calculate the annual deposit needed we need to use the following version of the final value formula:

FV = {A*[ (1+i) ^n-1]}/i

A = annual deposit

Isolating A:

A = (FV*i) / {[ (1+i) ^n]-1}

A = (1,560,000*0.0031667) / [ (1.0031667^36) - 1] = $40,849