Textbook Problem

You are the finance manager for Olympia Industries. The company plans to purchase $1,000,000 in new assembly line machinery in 5 years.

a. How much must be set aside now at interest compounded semiannually to accumulate the $1,000,000 in 5 years?

b. If the inflation rate on this type of equipment is 4% per year, what will be the cost of the equipment in 5 years, adjusted for inflation?

c. Use the inflation-adjusted cost of the equipment to calculate how much must be set aside now.

d. Use the present value formula to calculate how much would be required now if you found a bank that offered 6% interest compounded daily.