Question

Pollution control equipment for a pulverized coal cyclone furnace is estimated to cost $190,000 two years from now and an additional $120,000 four years from now. If Monongahela Power wants to set aside enough money now to cover these future costs, how much must be invested at an interest rate of 8% per year, compounded semiannually

Answer 1

Answer: $250,096

Explanation:

To find out the amount that should be invested today, one should find the present values of both figures and add them up:

Interest rate should be periodically adjusted so: 8% / 2 = 4% per semi annum

No of periods should be adjusted as well.

Amount to be invested today:

$= \frac{190,000}{(1 + 0.04)^{2 * 2 periods} } + \frac{120,000}{(1 + 0.04)^{4 * 2 periods} }\\\\= \frac{190,000}{(1 + 0.04)^{4} } + \frac{120,000}{(1 + 0.04)^{8} }\\\\= 250,095.62$

= $250,096