A company wants to setup a reserve which will help the company to have an annual equivalent amount of Rs 15,00,000 for the next 20 years towards its employees welfare measures. This reserve is assumed to grow at the rate of 15% annually. Find the single payment that must be made now to the reserve.
Answers
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The single payment that must be made to the reserve is Rs. 93,88,950
Given:
Amount of reserve = 15,00,000
Time = 20 years
Growth rate = 15%
To Find:
The single payment must be made now to the reserve.
Solution:
Given a certain rate of return, present value (PV) is the current value of a future financial asset or stream of cash flows. The present value is the price of anything now, for instance, if someone is guaranteed $150 in a year.
Calculating the present value (PV) -
PV = FV / (1 + r)^t
Where:
FV is the future value, r is the annual interest rate and t is the number of years
Substituting the values -
PV = 15,00,000 / (1 + 0.15)^20
PV = 15,00,000 / 6.2593
PV = 93,88,950
Answer: The single payment that must be made to the reserve is Rs. 93,88,950
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