Answer to Question #203195 in Management for githmi

Question

. Mr. Ramesh currently works a finance executive. He pals to start his own business after 5 years from now. He estimated that the initial capital requirement of the business would be Rs. 500,000/=. He opened a special account at a finance company where he agreed deposit a fixed sum from his salary every year. If the bank offered an interest rate of 15% per annum, what would be the amount Mr. Ramesh should deposit every year if he wishes to receive the initial capital requirement of the business?

Answer 1

To get the annual payment in order to achieve a target of Rs 500,000 requires the calculation of yearly interest earned on the deposit.

Assume the yearly deposit is x

Then; Rs 500,000 = x(1+0.15)⁵ + x(1+0.15)⁴ + x(1+0.15)³ + x(1+0.15)² + x(1+0.15)¹

Rs500,000= 2.01x+1.75x+1.52x+1.32x+1.15x

500,000=7.75X

X=500000/7.75

X= Rs 64,516.13

Mr. Ramesh should be depositing Rs 64,516 yearly to achieve his target of Rs 500,000 in five years.