How much should Linda set aside now to buy equipment that costs 6,100 in one year? The current interest rate is 0.7% annually, compounded annually.
x(1.07)^1 = 6100
x =6100/1.07 = $5700.93
Thank you Reiny
To determine how much Linda should set aside now to buy equipment that costs $6,100 in one year, we can use the concept of present value. Present value calculates the current value of a future sum of money, taking into account the time value of money and any interest earned.
The formula to calculate present value is:
Present Value = Future Value / (1 + interest rate)^n
Where:
- Present Value is the amount to be set aside now
- Future Value is the amount needed in the future
- Interest rate is the annual interest rate
- n is the number of compounding periods
In this case, the future value is $6,100, the interest rate is 0.7% (or 0.007), and the compounding period is annually (so n = 1).
Let's plug in these values into the formula:
Present Value = $6,100 / (1 + 0.007)^1
Calculating the expression within the brackets:
Present Value = $6,100 / 1.007
Dividing $6,100 by 1.007 gives us:
Present Value ≈ $6,058.45
Therefore, Linda should set aside approximately $6,058.45 now to buy the equipment that costs $6,100 in one year, considering the given interest rate of 0.7% annually, compounded annually.