A contract was signed eight months ago requiring the payment of $13,000 plus interest at 8% after one year. What two equal payments made today and four months from today are equivalent to the original contract? Assume that money is now worth 5%. Use four months from today as the focal date.
A) $7,020.00
B) $7,070.11
C) $6,446.28
D) $13,809.84
E) $7,078.02

Question

Quizplus · Accepted Answer

The future value of the contract is $13,000 * (1 + 0.08) = $14,040. The present value of this amount four months from today at 5% is $14,040 / (1 + 0.05 * (4/12)) = $13,809.84. The two equal payments, one today and one four months from today, should have a present value of $13,809.84. Solving for the equal payments using the formula for the present value of an annuity, we find that each payment is approximately $7,070.11.

A Contract Was Signed Eight Months Ago Requiring the Payment