Answer to Question #163154 in Quantitative Methods for saleemaslam

Question

Debt payments of $400 due today and $900 due in three years are to be combined into a single payment due two years from now. What is the size of the single payment if interest is 8% compounded quarterly? ___________

Need it in 30 minutes

Answer 1

For the first payment:

$FV_1=PV_1(1+i)^n$

where FV is future value, PV is present value, i is the interest per compounding period, n is the number of compounding periods.

$FV_1=400(1+0.08/4)^{4\cdot2}=\$468.66$

For the second payment:

$PV_2=FV_2(1+i)^{-n}$

$PV_2=900(1+0.02)^{-1\cdot4}=\$831.46$

Single payment:

$FV=FV_1+PV_2=468.66+831.46=\$1300.12$