Answered

Atlas Long-Haul Transportation is considering installing Valutemp temperature loggers in all of its refrigerated trucks for monitoring temperatures during transit. If the systems will reduce insurance claims by $100,000 in each of the next 2 years, how much should the company be willing to spend now if it uses an interest rate of 12% per year

Answer :

Answer:

The amount the company should be willing to spend now is $169,005.10.

Explanation:

This can be calculated using the formula for calculating the present value of an ordinary annuity as follows:

PV = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)

Where;

PV = Present value or the amount the company should be willing to spend now =?

P = Annual insurance claim = $100,000

r = Interest rate = 12%, or 0.12

n = number of years = 2

Substitute the values into equation (1) to have:

PV = $100,000 * ((1 - (1 / (1 + 0.12))^2) / 0.12)

PV = $100,000 * 1.69005102040816

PV = $169,005.10

Therefore, the amount the company should be willing to spend now is $169,005.10.

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