A debt of 3500 due in 3 years and 2000 due in 5 years is to

A debt of $3500 due in 3 years and $2000 due in 5 years is to be repaid by a single payment of $1500 now and two equal payments that are due each consecutive years from now. If the interested rate is 8% compounded annually how much are each of the equal payments? A single payment is of $

Solution

Present value of outflow=Cash outflow*Present value of discounting factor(8%,time period)

=3500/1.08^3+2000/1.08^5

=$4139.579238

Present value of payments to be made=1500+x/1.08+x/1.08^2[where x=equal payments]

$4139.579238=1500+x[1/1.08+1/1.08^2]

(4139.579238-1500)=x*1.783264746

Hence x=equal payments=(4139.579238-1500)/1.783264746

which is equal to

=$1480.19(approx).