Answer:
Company should set aside $17,680 at 8% interest per year.
Explanation:
The payment made in future does not have equal value as today because there is an opportunity of reinvestment of that cash flow.
The amount of money required to make all the payment can be determined by calculating the present value of each cash payment.
Use following present value formula
Present value = Future value / ( 1+ r ) ^n
where
r is the interest rate
n is the number of year
Total Amount to save for payment = Immediate payment +[ Year 1 payment / ( 1 + r )^1 ] + [ Year 2 payment / ( 1 + r )^2 ] + [ Year 3 payment / ( 1 + r )^3 ] + [ Year 4 payment / ( 1 + r )^4 ] + [ Year 5 payment / ( 1 + r )^5 ]
Total Amount to save for payment = $10,000 +[ $1,000 / ( 1 + 8% )^1 ] + [ $1,500 / ( 1 + 8% )^2 ] + [ $2,000 / ( 1 + 8% )^3 ] + [ $2,500 / ( 1 + 8% )^4 ] + [ $3,000 / ( 1 + 8% )^5 ]
Total Amount to save for payment = $10,000 + $926 + $1,286 + $1,588 + $1,838 + $2,042 = $17,680
