A $3,000 obligation due eight months from now is settled by two equal payments, one five months from now and the other nine months from now. If money can earn interest at 16%, what is the size of each payment? Use a focal date five months from now.
A) $3,038.46
B) $1,723.64
C) $861.82
D) $1,479.77
E) $2,959.54

Question

Quizplus · Accepted Answer

To find the size of each payment, we need to calculate the present value of the $3,000 obligation at the focal date (five months from now) and then determine the equal payments. The present value of the $3,000 due in eight months is $3,000 / (1 + 0.16 * (3/12)) = $2,959.54. The present value of the second payment (due in nine months) at the focal date is X / (1 + 0.16 * (4/12)). The first payment is X. Solving the equation X + X / (1 + 0.16 * (4/12)) = $2,959.54 gives X = $1,479.77.

A $3,000 Obligation Due Eight Months from Now Is Settled