A contract guarantees payment of $500 a month for the next 18 months starting today . How much is that contract worth today if the interest rate is 12% compounded monthly?
A)$8281.14
B)$8199.15
C)$9905.58
D)$9087.50

Question

Quizplus · Accepted Answer

The contract's value today can be calculated using the present value of an annuity formula: $PV = P \times \left[\frac{1 - (1 + r)^{-n}}{r}\right]$, where $P$ is the payment amount, $r$ is the monthly interest rate, and $n$ is the total number of payments. Given $P = $500$, $r = \frac{12\%}{12} = 0.01$ (1% monthly), and $n = 18$, the calculation is $PV = 500 \times \left[\frac{1 - (1 + 0.01)^{-18}}{0.01}\right]$, which equals approximately $8281.14.

A Contract Guarantees Payment of $500 a Month for the Next