Cash Flow Equivalences. Southwestern Moving and Storage wants to have enough money to purchase a new tractor-trailer in 5 years at a cost of $290,000. If the company sets aside $100,000 in year 2 and $75,000 in year 3, how much will the company have to set aside in year 4 in order to have the money it needs if the money set aside earns 9% per year?

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Business

Evelyn Wood

20 July, 15:23

Cash Flow Equivalences. Southwestern Moving and Storage wants to have enough money to purchase a new tractor-trailer in 5 years at a cost of $290,000. If the company sets aside $100,000 in year 2 and $75,000 in year 3, how much will the company have to set aside in year 4 in order to have the money it needs if the money set aside earns 9% per year?

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Bridger Barrett · Answer 1

They must set aside $65,494.95 at the end of year 4.

Explanation:

Giving the following information:

Southwestern Moving and Storage wants to have enough money to purchase a new tractor-trailer in 5 years for $290,000. If the company sets aside $100,000 in year 2 and $75,000 in year 3.

Interest rate = 9%

We will assume that the money gets set aside at the end of each period.

First, we need to calculate the accumulated money of the first two investments using the following formula:

FV = PV * (1+i) ^n

Year 2: FV = 100,000 * (1.09) ^3 = 129,503

Year 3: FV = 75,000 * (1.09) ^2 = 89,107.5

Total = $218,610.5

Difference = 290,000 - 218,610.5 = 71,389.5

Final value = 71,389.5

We need to find the present value:

PV = FV / (1+i) ^n

PV = 71,389.5 / (1.09) = 65,494.95