Question & Answer: 2.24 A small oil company wants to replace its Micro Motion Coriolis flowmeters with nickel-based steel alloy flowmeters from the Emerso…..

2.24 A small oil company wants to replace its Micro Motion Coriolis flowmeters with nickel-based steel alloy flowmeters from the Emerson F-Series. The replacement process will cost the company $50,000 three years from now. How much money must the company set aside each year beginning 1 year from now in order to have the total amount in 3 years? Assume the company earns a generous 20% per year on invesmen nd.

Expert Answer

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present valueinterna
r=rate of interest
n=time period.

Hence

$ 50,000 = P * ( 1+20/100) ^ 2 + P * ( 1+20/100) ^ 1 + P

or $ 50,000 = P * [( 1+20/100) ^ 2 + ( 1+20/100) ^ 1+1]

or $ 50,000 = P * [ 3.64]

or P = $ 50,000 / 3.64

Hence P = 13,736.26

Hence, the correct answer is $ 13,736.26

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