Question

A payment of $12,000 is due in 1 year and $10,800 is due in 2 years. What two equal payments, one in 3 years and one in 4 years would replace these original payments? Assume that money earns 3.25% compounded quarterly.

Answer 1

Solution :-

Interest Rate ( Compounded Quarterly ) =3.25%

Therefore Effective annual rate = ( 1 + 3.25% / 4 )⁴ - 1 = 0.0329 = 3.29%

Now Future Value at the end of two years =

= $12000 * ( 1 + 0 .0329 ) + $10,800

= $23,194.78

Now let the amount receive in year 3 and 4 be X

Now According to question

X * PVAF ( 3.29% , 2 ) = $23,194.78

X = $23,194.78 / 1.9054

X = $12,172.78

Therefore two equal payments one in 3 years and one in 4 years that would replace these original payments = $12,172.78

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