Question

If money earns 5.16% compounded quarterly, what single payment in three years would be equivalent to a payment of $3,620 due two years ago, but not paid, and $650 today?

Answer 1

- A payment due 2 years ago but not paid is of $3620

Calculating its Future Value 3 years from now which means a total of 5 years of Interest compounding(i.e., 2 before + 3 upcoming)

Future Value = Invested Amount*(1+r)^n

Where,

r = periodic Interest rate = 5.16%/4 = 1.29%

n= no of periods = 5 years*4 = 20

Future Value = $3620*(1+0.0129)^20

Future Value = $3620*1.29220501642

Future Value = $4,677.78

- Another payment which is due today is $650

Calculating its Future Value in 3 years as well:-

Future Value = Invested Amount*(1+r)^n

Where,

r = periodic Interest rate = 5.16%/4 = 1.29%

n= no of periods = 3 years*4 = 12

Future Value = $650*(1+0.0129)^12

Future Value = $650*1.16626932649

Future Value = $758.08

So, Single payment in 3 years is equivalent to = $758.08 + $4677.78

Single payment in 3 years is equivalent to = $5435.86

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