Calculate the present value of 120 payments of $50.00 made at the end of each of 120 consecutive months respectively if money is worth 12% compounded monthly.
A) $3485.03
B) $3485.02
C) $6000.00
D) $3000.00
E) $34 850.30

Question

Quizplus · Accepted Answer

This is a case of an annuity due, where payments are made at the beginning of the month. We use the formula for the present value of an annuity due:
PV = PMT x [(1 - (1 + r)^-n)/r] x (1+r)
Where PV is the present value, PMT is the payment, r is the interest rate per period, and n is the number of periods. Since the interest rate is given as an annual rate but compounding is monthly, we need to use the monthly interest rate, which is r = 12%/12 = 1%.
Plugging in the values:
PV = $50 x [(1 - (1 + 1%)^-120)/1%] x (1+1%)
PV = $50 x [(1 - 0.0757)/0.01] x 1.01
PV = $50 x 74.2068 x 1.01
PV = $3,485.03
Therefore, the best choice is A.

Calculate the Present Value of 120 Payments of $50