A debtor offers to repay a debt by making a payment of $500 one year from...

A debtor offers to repay a debt by making a payment of $500 one year from today, $3,000 three years from today, and $4,000 four years from today. The lending agency would rather receive the money in 4 equal end of year payments. Assuming a TVOM of 6%, how much would the debtor need to pay to make these cash flows equivalent?

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Expert Solution

Present value = ($500 / (1+6%)) + ($3000 / (1+6%)^3) + ($4000 / (1+6%)^4)
= $471.6981 + $2,518.8578 + $3,168.3746
= $6,158.93

Calculation of annual equal payment using Excel:
=PMT(rate,nper,pv,fv)
=PMT(6%,4,-6158.93,0)
= $1,777.41

Annual equal payment = $1,777.41

jeff jeffy answered 2 years ago

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