Question
A contract requires two payments: $3500 today and $5500 in four years. Interest is 12% compounded monthly. Suppose that this contract will be replaced by
A contract requires two payments: $3500 today and $5500 in four years. Interest is 12% compounded monthly. Suppose that this contract will be replaced by a single payment, equivalent to the sum of the two payments. When should this single payment be made? State your answer in years and months (0 to 11).
For full marks you should do the following: a) Sketch a completed timeline that clearly indicates payment amounts and due dates.
[1 mark]
b) Clearly state the appropriate equation(s) that need to be solved, and give all values that you will substitute into the equation(s). [1 mark]
c) Show your calculations to solve the equation(s). [1 mark]
d) Clearly indicate your final answer. [1 mark]
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