Question

Question 1 : Your uncle offers to sell you his vintage Rolls Royce. He suggests a payment plan where you pay just $13,000 today, $7100 in 12 months and $69,000 in exactly 20 months from today. If the interest rate is 12.8% per annum compounding monthly, what is the value of the offer (in present day dollars, rounded to the nearest dollar; don’t show $ sign or commas)?

is there anything not clear ?

Answer 1

The question can be solved using the NPV function of excel or the financial calculator.

Let us first go through all the details given in the question:

• T(0) = -13,000
• T(12) = -7100
• T(20) = -69,000
• Interest rate = 13.5782%

Note: First we will calculate the effective interest rate and the formula is

i=(1+r/m)^m-1

where, I =effective interest rate

r = interest rate (12.8%)

m = number of compounding in a year (12)

I is 13.5782% (Effective rate)

Therefore, The value of the offer is 18,393.42$ in present day.

I hope you find this helpful.