Question

Question 13 A company needs an amount of $600,000 four years from now. How much could the company afford to spend now at an interest rate of 12% per year ? $381,300 $044,400 $427,080 $600,000

Answer 1

13.) Option 'A' is correct.

We will use the concept of compound interest.

A= P*(1+r/100)ⁿ

Where, A= Amount after 'n' years .( Also called future value)

P= Principal value( Present value)

r= rate of interest.

n= number of years.

Here,

A=$600,000,r=12%,n= 4 years

Substituting in the above formula,

$600,000= P*(1+12/100)⁴

P=($600,000)/(1+0.12)⁴ = ($600,000)/(1.12)⁴ = $600,000/1.5735 = $381,310.84

Thus, now the company should spend $381,310.

Therefore, Option 'A' is correct.

14.) Option 'B' is correct. Closest to 14 years .

We can use either ,A/P factor or P/A factor.

Using A/P factor,

$60,000(A/P,10%,n) = $8000

(A/P,10%,n) =$8000/$60,000= 0.133

(A/P,10%,n) = 0.133

From Compound interest table(you can download the table from Google) , we can get the value of (A/P,10%,n)

On looking in the table for 10% , corresponding value of 'n' for (A/P,10%,n)=0.133 is in between 14 and 15.

So, closest value of 'n' is 14 years.

Therefore, Option 'B' is correct.