Debts of $3800.00 due three months from now and $3600.00 due twenty-one months from now are...

Debts of $3800.00 due three months from now and $3600.00 due twenty-one months from now are to be settled by two equal payments due in three months and nine months from now respectively. Determine the size of the equal replacement payments if interest is 5.5% p.a. compounded quarterly.

Expert Solution

$ 3,606.98

Step-1:Present Value of future cash flows

Quarter	Cash flow	Present Value of 1	Present Value of cash flow
a	b	c=1.01375^-a	d=b*c
1	$ 3,800.00	0.9864365	$ 3,748.46
7	$ 3,600.00	0.9088327	$ 3,271.80

Total			$ 7,020.26

Working:

Quarterly interest rate	=	5.5%/4
	=	0.01375

Step-2:Calculation of two equal payment

Two Equal Payment	=	Present Value of cash flow	/	Present Value of annuity of 1
	=	$ 7,020.26	/	1.946295
	=	$ 3,606.98

Working:

Present Value of 1:

1(3 months)	=	1.01375^-1	=	0.986436
3(9 months)	=	1.01375^-3	=	0.959859

Total				1.946295

jeff jeffy answered 1 year ago

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