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A company needs to buy a machine that costs 200000 now, after 5 years. If the rate of...

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lxsptter | Student, Undergraduate | (Level 2) Valedictorian

Posted July 10, 2013 at 2:35 PM via web

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A company needs to buy a machine that costs 200000 now, after 5 years. If the rate of inflation is at 8%, what are the equal instalments that the company should set aside from its yearly inflows.

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justaguide | College Teacher | (Level 2) Distinguished Educator

Posted July 10, 2013 at 2:44 PM (Answer #1)

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The company wants to buy a machine after five years. The present price of the machine is 200000. The annual rate of inflation is 8%. The rate of inflation is the rate at which prices of products in the economy increase every year.

If the price of the machine increases at the rate of inflation of 8%, the price of the machine after 5 years will be 200000*(1+0.08)^5 = 293865.61

This amount is accumulated over a period of 5 years by the company as equal deductions from its inflows. The amount that has to be set aside each year is equal to 293865.61/5 = 58773.12

The company has to set aside an amount equal to 58773.12 each year to be able to buy the machine after 5 years.

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