Question

Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree. At a 6.69 percent discount rate, what are these payments worth to you on the day you enter college?

Group of answer choices $4,201.20 $4,299.88 $4,316.77 $4,608.87 $4,800.00

Answer 1

The amount is computed as shown below:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

r is computed as follows:

= 6.69% / 12 (Since the payments are monthly, hence divided by 12)

= 0.5575% or 0.005575

n is computed as follows:

= 4 x 12 (Since the payments are monthly, hence multiplied by 12)

= 48

So, the present value will be as follows:

= $ 100 x [ [ (1 - 1 / (1 + 0.005575)⁴⁸ ] / 0.005575 ]

= $ 100 x 42.01207105

= $ 4,201.20 Approximately

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