Question

. A friend offers to buy your car with four equal annual payments of $2,500. The first payment is due two years from today. Assuming that the annual interest rate is 10% and that you believe that the car is currently worth $9,000, should you accept?

Answer 1

Present value of cash flows=cash flows*Present value of discounting factor(rate%,time period)

=2500/1.1^2+2500/1.1^3+2500/1.1^4+2500/1.1^5

=2500[1/1.1^2+1/1.1^3+1/1.1^4+1/1.1^5]

=$2500*2.88169586

=$7204.24(Approx).

Hence since present value of payments is less than $9000;offer should not be accepted.