Question

Income from the work has averaged $7,000 per month for the past 5 years. What is the income stream’s equivalent worth now at an interest rate of 12% per year, compounded quarterly?

Answer 1

Ans. Quaterly effective interest rate, r = Annual interest rate / 4 = 12/4 = 3% or 0.03

=> Monthly effective interest rate, i = (1+0.03)^1/3 - 1 = 0.0099 or 0.99%

Monthly income, A = $7000

Number of periods, n = 5*12 = 60 months

Using the formula for future value of equivalent cashflow,

Future value, FV = A*[(1-1/(1+i)^n)/i] * (1+i)^60

=> FV = 7000*[(1-1/(1+0.0099)^60)/0.0099] * (1+0.0099)^60

=> FV = $569853.67

Thus, income stream's equivalent worth now is $569853.67

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