Twelve payments of $10,000 each are to be repaid monthly at the end of each month. The monthly interest rate is 2%. (4.7)

a. What is the present equivalent (i.e., $P_{0}$ ) of these payments?

b. Repeat Part (a) when the payments are made at the beginning of the month. Note that the present equivalent will beat the same time as the first monthly payment.

c. Explain why the present equivalent amounts in Parts (a) and (b) are different.

Question

Twelve payments of $10,000 each are to be repaid monthly at the end of each month. The monthly interest rate is 2%. (4.7)

a. What is the present equivalent (i.e., [latex]P{0}[/latex]) of these payments?

b. Repeat Part (a) when the payments are made at the beginning of the month. Note that the present equivalent will beat the same time as the first monthly payment.

c. Explain why the present equivalent amounts in Parts (a) and (b) are different.

Accepted Answer

(a) P = $10,000 (P/A, 2%, 12) = $10,000 (10.5753) = $105,573
(b) P = $10,000 + $10,000 (P/A, 2%, 11) = $107,868
(c) The present equivalent in Part (b) is higher because the cash flows are not as far into the future, so less discounting occurs.

Question 4.E.E: Twelve payments of $10,000 each are to be repaid monthly at ...

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