Hi john sir, I read this question on the forum and become worried about this topic.
i read also your reply but i could not understand that what amount will be considered as 'x'. can you help me on this?
Brackenwood Plc is a tree felling company that needs to replace a major item of capital equipment in 3 years time. The estimated replacement cost will be $500,000. Funds for the replacement are to be provided by setting aside 4 equal annual sums and investing them at 10% pa. The first amount will be invested immediately, the last in 3 years time.
What is the annual amount that Brackenwood should set aside?
The correct answer is – $107,686.
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12y ago#1The present value of the annual amount has to be the same as the present value of the estimated replacement cost.
The PV of the replacement cost is 500,000 x 0.751 (3 year discount factor at 10%)
If the annual amount is X, then it is X immediately (so discount factor of 1) and then X p.a. fir years 1 to 3 - annuity discount factor for 3 years is 2.487.
So PV of all the annual amounts is X x (1 + 2.487) = 3.487 X
If you make 3.487 X equal to 500,000 x 0.751 then you can calculate X and you have your answer :-)
hi john sir, thanx thanx thanx alot. i got it. so kind of you. God bless you. i want to be a teacher like u.
12y ago#3You are welcome :-)
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