Question

Mae is due to make a payment of $1000 now. Instead, she has negotiated two equal payments, one year and two years from now. Determine the size of the equal payments if money is worth 8% compounded quarterly. *

Answer 1

Let the equal Payment be '$ Y'

Now using the formula

Present Value = Future Value x PVF

Here we have interest rate of 8% which is compounded quarterly.

So we will take Interest = 2% (Quarterly Interest) and Take 1 year = 4 qtr and 2 year = 8 qtr.

So, we have

$1,000 = Y x PVF (2%,4) + Y x PVF(2%, 8)

$1,000 = Y x 0.9238 + Y x 0.8535

$ 1,000 = 1.7773 Y

Y = $1000 / 1.7773

Y = $562.65 (Approx.)

So equal payment of $562.65 at Year 1 and year 2 with interest rate of 8% compounded quarterly is equal to Present Value of $1,000.

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