Question

A person owes $350 due in 3 months and $525 due in 6 months. If money is worth 16%, what single payment in 6 months will settle both obligations? Put the focal date at 6 months.

Answer 1

Present Value of 350 = 350 / (1+r)^n

r = 0.16 /4 = 0.04

n = 1

= 350 / (1+0.04)^1

= 336.538461535

Present Value of 525 = 525 / (1+r)^n

r = 0.16 /4 = 0.04

n = 2

= 525 / (1+0.04)^2

= 485.392011833

Total Present Value = 336.538461535 + 485.392011833

= 821.93

Payment after 6 months

Future Value = Present Value * (1+r)^n

r = 0.04

n = 2

= 821.93 * (1+0.04)^2

= 888.999 OR 889