Question

Suppose you will receive $300 at the beginning of each month for the next 15 years. If your opportunity cost is 8.5%, what is the present value of these payments? hp 10bii plus financial calculator please

Answer 1

Sol:

Monthly payment received (PMT) = $300

Period (N) = 15 years, Monthly = 15 * 12 = 180

Opportunity cost (I) = 8.5%, Monthly = 8.5 / 12 = 0.7083%

To determine Present value (PV) of the payments:

PV = PMT * 1 - 1/(1 + I)^N / I * (1 + N)

PV = 300 * 1 - 1/(1 + 0.7083%)^180 / 0.7083% * (1 + 0.7083%)

PV = 300 * 1 - 1/(1 + 0.007083)^180 / 0.007083 * (1 + 0.007083)

PV = 300 * 1 - 1/(1.007083)^180 / 0.007083 * (1.007083)

PV = 300 * 101.5521 * 1.007083

PV = $30,680.70

Therefore Present value (PV) of the payments will be $30,680.70

Same can be determined in excel using PV function:

PMT	-300
NPER (N)	180
Rate (I)	0.7083%
PV	$30,680.70

Working