Required information Durco Automotive needs a 3 million bala

Required information Durco Automotive needs a $3 million balance in its contingency fund 3 years from now. The chief financial officer (CFO) wants to know how much to deposit now into Durco\'s high-yield investment account. Determine the amount if it grows at a rate of 10% per year using simple interest. The amount if it grows at a rate of 10% per year using simple interest is $

Solution

PART A

Simple interest = P*R*T                       P = Principle amount, R = rate of interest, T = time

                            = P*10/100*3

                           = 3P/10

Future Value = P + Simple interest

   $3million = P + 3P/10

                     = 13P/10

                     = 1.3P

P = $3million/1.3

   = 2307692.3076

PART B

Compound interest

FV(future value) = P*(1+R)ⁿ   (n = no. of years)

$3 million = P*(1+10/100)³

                              = P*(11/10)³

                  P = $3million (10/11)³

            P = 2187000