Question

An investment in a lease offers returns of ​$2500 per month due at the beginning of each month for five years. What investment is justified if the returns are deferred for two years and the interest required is 4​% compounded quarterly​?

Answer 1

Sol:

Return (PMT) = $2500 per month at the beginning period

Interest rate (r) = 4% compounded quarterly, Effective monthly interest rate = (1 +0.04/4)^(1/3) - 1 = 0.003322 or 0.3322%, Annual rate = 3.9867

Period (nper) = 5 years, Monthly = 5 x 12 = 60

We have to determine Present value (PV) of the investment by using PV function for beginning period in excel sheet:

PMT	-2500
Interest rate	0.003322284
NPER	60
PV	$136,242.93

Therefore PV of the investment is $136,242.93

Now investment to be justified if the returns are deferred for two years will be as follows:

Investment to be justified = PV / (1 + r)^2

Investment to be justified = 136,242.93 / (1 + 3.9867%)^2

Investment to be justified = 136,242.93 / (1.039867)^2

Investment to be justified = $125,996.37

Therefore investment to be justified if the returns are deferred for two years will be $125,996.37

Working