Question

A manufacturer of industrial grade gas handling equipment wants to have $725,000 in an equipment replacement contingency fund 10 years from now. If the company plans to deposit a uniform amount of money each year beginning now and continuing through year 10 (total of 11 deposits), what must be the size of each deposit

Answer 1

Answer:

$41,354.98

Explanation:

Required future worth = Annual savings x FVIFA(r%, N) x (1 + r)

Required annual savings ($) = [Required future worth / FVIFA(r%, N)] / (1 + r)

= 725,000 / [FVIFA(10%, 10) * 1.1]

= 725,000 / (15.9374 * 1.1)

= 725,000 / 17.53114

= 41354.98318991235

= $41,354.98

Note: Since this is annuity due (deposit made at beginning of year), FV is divided by (1+r).