Debts of $2800.00 due three months from now, $3500 due 15 months and $4600.00 due twenty-one months from now are to be settled by two equal payments due in three months and nine months from now respectively. Determine the size of the equal replacement payments if interest is 5.5% p.a. compounded quarterly.
A) $5450.00
B) $5176.03
C) $5246.71
D) $10 352.05
E) $10 900.00

Question

Quizplus · Accepted Answer

The present value of the debts and the present value of the replacement payments must be equal. Calculate the present value of each debt at the present time (3 months from now) using the formula for present value with quarterly compounding. Then, calculate the present value of the two equal payments at the same point in time. Solve for the size of the equal payments.