A company will need $40,000 in four years for a new addition. To meet the goal, the company will deposit money into an account paying 6% annual interest, compounded monthly. How much should the company deposit each month in order to be able to pay for the addition?
A company will need $40,000 in four years for a new addition. To meet the goal, the company will deposit money into an account paying 6% annual interest, compounded monthly. How much should the company deposit each month in order to be able to pay for the addition?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Complete the problems below.
1. A company will need $40,000 in four years for a new addition. To meet the goal, the
company will deposit money into an account paying 6% annual interest, compounded
monthly. How much should the company deposit each month in order to be able to pay
for the addition?
Looking at a couple of scenarios to compare to the initial investment (above):
a. Exactly 20 months after the company begins their investment (above), they receive a
payment from a settled lawsuit of $2000 that they immediately deposit into the
account. If they continue, uninterrupted, with their monthly deposits, will the
company be able to afford to add a skylight to the addition if the change order (the
amount added to the original cost of $40,000) is $3000? If yes, how much, if any
would be left over? If no, how much more money will they need?
b. Suppose that instead of depositing the money monthly for five years, they decide to
finance the addition (the original $40,000) for four years at 5% interest,
compounded monthly. How much would their monthly payments be? How much
will the company spend on the addition if they choose this finance option instead of
the original savings plan (this is the amount of money they will pay)? Assume that
they use the $2000 from the settlement on something totally different and it doesn't
come in to play in this plan.
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