Q7.5 B9

In this question you know the present value of two payments which you are going to have to make in the future. The total is 1100. You are going to have to make two equal payments, one in 4 months and another in 6 months. Interest is 8.5%. Two things: you know the present value of two payments which are in the future, so we use the present value formula P = S/(1 + rt). AND since the two payments are the same, we can call each payment 'x'.

So...

1100 = x/(1+ 0.085*4/12) + x/(1 + 0.085*6/12)
1100 = x/1.0283 + x/1.0425
1100 = 0.972 x + 0.959 x
1100 = 1.932 x
x = 1100/1.932 = 569.36

Note that my answer is slightly different from the book's answer just because of rounding.

Think through this problem carefully and make sure you 'get it'. Working out whether an interest problem is 'future value' or 'present value' isn't easy. So work at it. Example 7.5 H covers the same ground as the question above.