Question

Presley Machinery sold some equipment for $9,500 and established a promissory note requiring 1.20% compounded monthly, and due in 4 years. After 1½ years, the note was sold to a finance company at a discount rate of 13% compounded quarterly. What are the proceeds of the sale? Answer(s) should be rounded to the nearest cent.

Proceeds = ?

Answer 1

Step 1: Periodic interest rate

1.2%/12 = 0.1%/month

R = 0.1%

i = 0.001

Step 2: Number of periods

4 years * 12 months = 48

Step 3: Maturity Value

=$9,500*(1.001)^48

=$9,966.88

Step 4: Periodic interest rate at time of sale of note

13%/4 = 3.25%/Qtr

R = 3.25%

i = 0.0325

Step 5: Time before due date

4 years – 1.5 years = 2.5 years

N = 2.5 years * 4 = 10 qtrs

Step 6: Proceeds from sale of note

$9,966.88 = PV*(1.0325)^10

PV = $9,966.88/(1.0325)^10

PV = $9,966.88/1.3769

PV = 7238.66

Proceeds = $7239 (rounded to nearest cent)