Question

In: Finance

A scheduled payment of $8,000 due in one year is to be replaced with two payments:...

A scheduled payment of $8,000 due in one year is to be replaced with two payments: the first due in 7 months and the second due in 22 months. Calculate the size of the two payments if the second payment is to be twice as large as the first payment, and money can earn 6% compounded monthly.

Solutions

Expert Solution

Current
Month Payment PV factor @0.50%, 1/(1+0.50%)^t Payment* PV factor
12 $             8,000 0.94190534 $7,535.24
Revised arrangement
With the revised arrangement, the PV should remain same
Month Payment PV factor @0.50%, 1/(1+0.50%)^t Payment* PV factor
7 P 0.96568963 0.965689629820556*P
22 2*P 0.896079705 0.896079705221805*2*P
0.965689629820556*P+0.896079705221805*2*P= 7,535.24
2.75784904026417*P = 7,535.24
P= 7535.24/2.75784904026417
P= $       2,732.29
First Payment= $       2,732.29
Second Payment= $       5,464.58

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