Durco Automotive needs a $1 million balance in its contingency fund 3 years from now. The CFO (chief financial officer) 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 20% per year (a) simple interest, and (b) compound interest.
What will be an ideal response?
(a) F = P + Pni
1,000,000 = P + P(3)(0.20)
1.60P = 1,000,000
P = $625,000
(b) P(1+i)(1+i)(1+i) = 1,000,000
P = 1,000,000/[(1+0.20)(1+0.20)(1+0.20)]
= $578,704
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