Question

Question 1. .Scheduled payments of $400 due now and $700 due in five months are to be settled by a payment of $500 in three months and a final payment in eight months. Determine the amount of the final payment at 6% p.a., using eight months from now as the focal date.

Question 2. Two amounts owing from the past were to be paid today. One debt was $620 from one year ago and the other was $925 from six months ago. Determine the single payment today that would fully repay the debts. Allow for simple interest at 12% p.a.

Answer 1

ANSWER 1.

To solve this problem we have to set the originally scheduled payments equal to the replacement payments and $x i.e the final payment. Since the focal point occurs in the future, we use the future value formula for each payment.

$400[1+0.06(8/12)] + $700[1+0.06(3/12)] = $500[1+0.07(5/12)] + $x

$416 + $710.5 = $514.58 + $x

$x = $611.92

ANSWER 2.

we need to calculate the future value of the debt due before.

$620(1+0.12*1) + $925(1+0.12*0.5)

$694.4 + $980.5

=$ 1674.9