Kristy has to make rental payments of $1000 at the start of every month,throughout the four-year duration of her university course.Her university fees are $4000 to be paid at the start of each year.She earns $1500 per month (paid at the end of each month)from a part-time job.Assume an interest rate of 8% p.a.and that she keeps the part-time job for the next four years.How much money,in present value terms,can she withdraw each month for the next four years?
A)$144
B)$126
C)$55
D)$177

Question

Quizplus · Accepted Answer

The correct answer is A.The present value of the rental payments is $1000 x (1 - (1 + 0.08/12)^(-48)) / (0.08/12) = $36,000.The present value of the university fees is $4000 x (1 - (1 + 0.08)^(-4)) / 0.08 = $14,400.The present value of the part-time job earnings is $1500 x (1 - (1 + 0.08/12)^(-48)) / (0.08/12) = $54,000.Therefore, the total present value of the cash flows is $36,000 + $14,400 + $54,000 = $104,400.The monthly withdrawal amount is $104,400 / (48 x 12) = $177.

Kristy Has to Make Rental Payments of $1000 at the Start