Question

1. Someone offers to buy your car for five, equal annual payments, beginning 8 years from today. If you think that the present value of your car is $18,500.00 and the interest rate is 14%, what is the minimum annual payment that you would accept?

- $12,135.68

-$13,484.09

-$14,832.50

-$16,180.91

Answer 1

Present value=Cash flows*Present value of discounting factor(rate%,time period)

18500=Cash flow for year 8/1.14^8+Cash flow for year 9/1.14^9+Cash flow for year 10/1.14^10+Cash flow for year 11/1.14^11+Cash flow for year 12/1.14^12

18500=Annual cash flow[1/1.14^8+1/1.14^9+1/1.14^10+1/1.14^11+1/1.14^12][Since cash flows are equal;hence cash flow for year8=Cash flow for year 9 and so on]

18500=Annual cash flow*1.37198729

Annual cash flow=18500/1.37198729

=$13484.09(Approx)