Well-managed companies set aside money to pay for emergencies that inevitably arise in the course of doing business. A commercial solid-waste recycling and disposal company in Mexico City puts 0.5% of its after-tax income into such an account. (a) How much will the company have after 7 years if after-tax income averages $15.2 million and inflation and market interest rates are 5% per year and 9% per year, respectively? (b) What will be the buying power of that amount in today’s dollars?
What will be an ideal response?
(a) Future amount is equal to the return at the market interest rate
F = 0.005(15,200,000)(F/A,9%,7)
= 76,000(9.2004)
= $699,230
(b) Buying power = 699,230/(1 + 0.05)?
= 699,230(0.7107)
= $496,943
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