Question

# SIX Company signed a contract to receive \$500 per month for one year. The first receipt...

SIX Company signed a contract to receive \$500 per month for one year. The first receipt is due immediately. Assume an interest rate of 12%. Determine the present value.

a. \$3,097

b. \$5,628

c. \$3,469

d. \$5,684

• Correct Answer = Option ‘D’ \$ 5,684
• Working

>12% is annual rate
>Monthly rate = 12% x 1/12 = 1%

 Present value factor Future value Present value [A] [B] [C = A x B] Month #1 1 =1/(1.01^0) \$500 \$500 Month #2 0.99009901 =1/(1.01^1) \$500 \$495 Month #3 0.980296049 =1/(1.01^2) \$500 \$490 Month #4 0.970590148 =1/(1.01^3) \$500 \$485 Month #5 0.960980344 =1/(1.01^4) \$500 \$480 Month #6 0.951465688 =1/(1.01^5) \$500 \$476 Month #7 0.942045235 =1/(1.01^6) \$500 \$471 Month #8 0.932718055 =1/(1.01^7) \$500 \$466 Month #9 0.923483222 =1/(1.01^8) \$500 \$462 Month #10 0.914339824 =1/(1.01^9) \$500 \$457 Month #11 0.905286955 =1/(1.01^10) \$500 \$453 Month #12 0.896323718 =1/(1.01^11) \$500 \$448 \$5,684 [ANSWER]

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