Question

Southwest Dry Cleaners believes that it will need new equipment in 6 year. The equipment will cost $26,000. What lump sum should be invested today at 10 percent compounded semiannually, to yield $26,000?

Answer 1

The amount will be equal to $14478.22.

What is compound interest?

Compound interest is the interest levied on the interest. The formula for the calculation of compound interest is given as:-

A = P (1+R/2)^2t

Where, A = Amount after 6 years = $26,000; P = Amount invested now; R = Annual rate of earning = 10% = 0.06; t = time = 6 years.

Substituting;

$26000 = P(1+\dfrac{0.1}{2})^{2*6}=P(1.7958)$

Therefore, P = 26000/1.7958 = $14478.22

Thus amount will be equal to $14478.22.

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