A company plans to replace its fleet of company cars in the

A company plans to replace its fleet of company cars in the near future. The company estimates that it will need $540,000 in 5 years. If the company can earn 5% interest compounded quarterly, how much should the company invest now in order to cover the cost of the cars in 5 years

Solution

Compoun Interest:

Amount = Principal( 1+r/100)^t

5% interest compounded quarterly ---- 5%/4 = 1.25% = 0.0125

t = 5*4 = 20 quaters

So, Amount = Principal( 1+0.0125)^20

Principal = 540,000/(1.0125^20)

= $421204.62   the company should invest now in order to cover the cost of the cars in 5 years