Answer to Question #246301 in Economics for Sera

Question

A 1,200,000 pesos machine was purchased by a company. The said machine has an anticipated economic life of 5 years with a salvage value of 80,000 pesos given that the annual rate of inflation is 7% during the next 5 years. The machine will then be replaced with the same new machine and the company will accumulate the necessary capital by making equal end-of-year deposits in a reserve fund that earns 6% per annum. Determine the amount of actual deposit.

Answer 1

The yearly deposit is:

$P = \frac{1,200,000 - 80,000}{(1.06^5 - 1)/0.06} = 198,683.97.$