You are thinking about buying a piece of art that costs $50,000. The art dealer is...

You are thinking about buying a piece of art that costs $50,000. The art dealer is proposing the following? deal: He will lend you the? money, and you will repay the loan by making the same payment every two years for the next 10 years? (i.e., a total of 5 ?payments). If the interest rate is 7% per? year, how much will you have to pay every two? years?

Expert Solution

Suppose payment of every 2 year is "x"

As per question,
Present Value of every 2 year's payment will be equal to cost of piece of art.

Year	Cash flows	Discount factor		Present Value
a	b	c=1.07^-a		b*c
2	x	0.873		0.873	x
4	x	0.763		0.763	x
6	x	0.666		0.666	x
8	x	0.582		0.582	x
10	x	0.508		0.508	x

	Total			3.393	x

	Now, according to question,

	Cost of piece of art	=	Present Value of every 2 years cash flow
	or,
	$ 50,000	=	3.393	x
	or,
	x	=	$ 14,736.07


	Thus,
	Payment of every 2 years is		$ 14,736.07

jeff jeffy answered 3 years ago

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