Answered: Jane Doe plans to make twelve…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Jane Doe plans to make twelve end-of-month payments of $17,000
each on a short term investment account. The account earns a monthly interest rate of 3%.

a. What is the present worth (i.e.,P0) of these payments?

b. Repeat Part (a) but assuming that they are beginning-of-month payments.

Expert Solution

Step 1: Formula used

To calculate the present worth (P0) of these payments, we can use the formula for the present value of an annuity:

$P subscript 0 equals P M T fraction numerator 1 minus left parenthesis 1 plus r right parenthesis to the power of negative n end exponent over denominator r end fraction$

Where:

$Error converting from MathML to accessible text.$ is the periodic payment amount, which is $17,000 in this case.
$Error converting from MathML to accessible text.$ is the monthly interest rate, which is 3% per month or 0.03.
$Error converting from MathML to accessible text.$ is the number of payments.

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