Question

Tabitha had to pay her friend $1,000, 3 months ago and he has to pay $630 in 2 months. If her friend was charging her an interest rate of 1.20% per month, what single payment would settle both payments today?

Note:

I tried to solve but the answer of 1651.58 is incorrect. Please help I used the formula FV = PV x (1+r)ⁿ +

PV = FV / (1+r)ⁿ and it didn't work. :(

Answer 1

Single payment that would settle both payments would be the difference between what Tabitha's friend had to receive from her and what he had to pay in future. Instead of adding the payments, you should deduct them. I am solving the question using financial calculator with steps for you to be able to follow completely.

Amount to be received from Tabitha today (FV at the end of 3 months)

PV = $1,000

I/Y = 1.20%p.m.

N = 3

PMT = 0

CPT -> FV = $1036.43

Amount to be paid by Tabitha's friend (PV at the end of 2 months)

FV = 630

I/Y = 1.20%p.m.

N = 2

PMT = 0

CPT ->PV = $615.15

Single payment that would settle both payments today = FV of amount received 3 months ago - PV of amount to be received in 2 months = $1036.43 - $615.15 = $421.28