Question

Tanya is selling her old car for $16,845. If a prospective buyer offers to make yearly payments for the next 5 years, what should Tanya set these payments to if the correct discount rate is 0.11?

Answer 1

This question requires application of PV of annuity formula, according to which

PV =

[1-(4+5)-) [1-(1+r)-n LT P= Periodic Payment r=rate per period n = number of periods

For this question,

$16845 = P * [\frac{1- (1 + 0.11)^{-5}}{0.11}]$

16845 = P * 3.6959

P = $4,557.76