Question

a) A loan of $5,000 is to be repaid in equal monthly payments over the next 2 years.
Determine the payment amount if interest is charged at a nominal annual rate of
15% compounded semiannually.
b) Net receipts from a continuously producing oil well add up to $120,000 over 1 year.
What is the present amount of the well if it maintains steady output until it runs dry in
8 years if r = 10% compounded continuously?

Answer 1

Question A) first we will calculate effective annual rate for 15% semi annual compounding

effective rate = (1+rate/n)^n -1

where n is no of compounding periods

= (1+0.15/2)^2 -1 = 15.5625%

Payment amount is 243.77(pmt function in excel)

Question B)

present value is 640191.14(npv function in excel)