Question

3. (a) Consider ears for the depos ligure. a payment series of 1-4.9 percent and N-15 itions (in S PAYMENTS) as shown in the Determine the PRESENT WORTH of the scheme. 4000 nes 7. 417 3. 15.432 1513 (153

Answer 1

Answer 3 (a)

Formula:

Present value is given by:

P = A/(1 + i)n

where A = Amount after n years , P = present value and i = interest rate = 4.9% = 0.049 and n = 3

Here We have five payments after every 15/5 = 3 Years.

Hence present Value of 2000 after 3 years is given by:

P = 2000/(1 + 0.049)^3

Similarly:

Hence present Value of 2000 after 6 years is given by:

P = 2000/(1 + 0.049)^6

Hence, Total Present value of future payment is given by:

P = 2000/(1 + 0.049)^3 + 2000/(1 + 0.049)^6 +2000/(1 + 0.049)^9 +2000/(1 + 0.049)^12 + 2000/(1 + 0.049)^15

= 6636.29

Also there is payment of 4000 at Time 0. Hence, present value of this 4000 payment at time 0 = 4000

Hence Total Present Worth of cash flows = 4000 + 6636.29 = 10636.29

Hence, Total Present Worth of cash flows = $10636.29

Note:

All payment are made i.e. there is cash out hence we should include (-) sign and consider the net present worth = -$10636.29