your uncle promise to give you $600.00 per quarter for the next five years. How much...

your uncle promise to give you $600.00 per quarter for the next five years. How much is his promise worth right now if the interest rate is 0.07 compounded quaterly?

Solutions

Expert Solution

Present worth factor(PWF)

Worth of $1 invested in each period for N periods with interest rate of i per period can be given by the Present worth factor(PWF)=(P/A, i,N)=(((1+i)^N)-1)/(i((1+i)^N))

Annual interest=0.07 compounded quarterly

i=interest rate for the period(quarter)=0.07/4= 0.0175

N=number of periods=5years=5*4=20 quarters

PWF=(((1+i)^N)-1)/(i((1+i)^N))=(((1+0.0175)^20)-1)/(0.0175*((1+0.0175)^20))= 16.75288

Hence Present worth of $600 per quarter for 20 quarter is=600*16.75288= $ 10,051.73

The Present Worth can also be calculated by excel PV function with Rate=0.0175, Nper=20,Pmt=600

Present worth of $600 per quarter for 20 quarter

$10,051.73

jeff jeffy answered 1 year ago

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