Question

Can you please explain me this question? Thanks!

What is the discounted value of the stream of payments: $1250 received at the end of every month for 3 years and 2 months? Interest is 2.75% compounded monthly.

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:

= 2.75% / 12 (Since the interest is compounded monthly, hence divided by 12)

= 0.002291667

n is computed as follows:

= 3 x 12 + 2 (Since the interest is compounded monthly, hence multiplied by 12)

= 38

So, the amount is computed as follows:

= $ 1,250 x [ (1 - 1 / (1 + 0.002291667)³⁸ ) / 0.002291667 ]

= $ 45,440.71 Approximately

Feel free to ask in case of any query relating to this question