Question 13
Your business will pay you distributions of $19,000 in 6 months and another $5,000 in 19 months. If the discount rate is 8% per annum (compounding monthly) for the first 9 months, and 11% per annum (compounding monthly) for the next 10 months, what single amount received today would be equal to the two proposed payments? (answer to nearest whole dollar; do not use $ sign or commas)
discount rate given = 8%
since it is monthly compounding discount rate = 8 / 12 = 0.66667% (for the first 9 months)
we should calculate present value using above discount rate
present value = 1 / (1+r)^n
Where r = interest rate , n = time period
so present value of first cash flow = 19000 / (1.0066667)^9 = 17897.08
discount rate for the next 10 months = 11% per annum so per month = 11 / 12 = 0.91667%
we use discount rates as 0.66667% for first nine months and then 0.91667% for next 10 months
so present value of second cash flow = 5000 / [(1.0066667)^9 x (1.0091667)^10 ] = 4299.02
total present value = 17897.08 + 4299.02 = 22196.1 or 22196(rounded to nearest dollar)
Question 13 Your business will pay you distributions of $19,000 in 6 months and another $5,000...
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