Question

11. LO3 Two payments of $5000 each are to be received four and eight months from now. a. What is the combined equivalent value of the two payments today if money can earn 6%? b. If the rate of interest money can earn is 4%, what is the payments' combined equivalent value today?

Answer 1

a)	Monthly interest rate = 6%/12
	=0.5%
	Present value = Future value /(1+r)^n
	Present value of cash flow = [500*1/(1.005)^4]+[500*1/(1.005)^8]
	=$970.57
b)	Monthly interest rate = 4/12 =0.33%
	Present value of cash flow = [500*1/(1.00333)^4]+[500*1/(1.00333)^8]
	=$980.26