Chuck needs to purchase a piece of machinery in 10 years. The item costs $1,800 today but its price inflates 4% per year. He will also have to pay sales tax of 7% on the purchase. To finance the purchase, Chuck deposits $50 into an account at the beginning of each quarter for the next 10 years. The effective annual interest rate is 6.5%. a) Will the balance of the fund be sufficient to purchase the piece of machinery in 10 years? (b) How much extra money will Chuck have to pay or how much extra will he have saved?
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The effective annual interest rate is 6.5%, so the quarterly interest rate is 6.5% / 4 = 1.625%. Using the formula for the future value of a series of deposits: FV = P * ((1 + r)^n - 1) / r Where: FV = future value P = quarterly deposit amount r = quarterly Show more…
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