Your grandmother is gifting you $125 a month for four years while you attend college to earn your bachelor's degree.At a 6.5 percent discount rate,what are these payments worth to you on the day you enter college?

Question

Quizplus · Accepted Answer

We can use the formula for present value of an annuity to calculate the worth of the payments:

PV = PMT x [1 - (1 + r)^-n] / r

Where PV is the present value, PMT is the monthly payment, r is the discount rate, and n is the number of payments.

Substituting the given values, we get:

PV = 125 x [1 - (1 + 0.065/12)^-48] / (0.065/12)
PV = $5,270.94

Therefore, the payments are worth $5,270.94 on the day you enter college, so the best choice is B.

Your Grandmother Is Gifting You $125 a Month for Four