TOPIC 4217

Description

Is a series of 10,000 equal quarterly payments of $80,000 equivalent to a present amount of $35,000 if

the interest rate is 8% per year, compounded quarterly?

SOLUTION.

Let's first calculate the present amount using the given amount and compare it with the given present

amount;

We are given that;

Periodic payments PMT = $800

Number of payments n = 100

Interest rate r = 8% or 2% compounded quarterly.

Now, the present value is given by'

PVannuity = PMT x [1 - (1 - (1 + r)^-n]/r

                 = $800 x [1 - (1 + 2%)^-100]/2%

PVannuity = $800 x 43.09835164

                  = $34,478.68

So, we can conclude that it's not equivalent to $35,000 rather it's equivalent to $34,478.68