qma help (1 Viewer)

[08er]

The beneficiary of an insurance policy has the option of receiving a lump-sum payemnt of $275,000 or 10 equal yearly payments, where the first payment is due at once. If interest is at 3.5% compouned annually, find the yearly payment.

This was the only question in the tutorial that i couldnt do. The answer is $31,948.19 but i keep getting answers in the 20-25k range

help please

 

[tommykins]

it'd be highly advisable you write out your working, rather than making someone do it from scratch

 

[08er]

im sure im using the wrong formula so my working doesnt matter

 

[Chelseafc65]

The beneficiary of an insurance policy has the option of receiving a lump-sum payemnt of $275,000 or 10 equal yearly payments, where the first payment is due at once. If interest is at 3.5% compouned annually, find the yearly payment.

This was the only question in the tutorial that i couldnt do. The answer is $31,948.19 but i keep getting answers in the 20-25k range

help please

For this question you want to find R, which is the monthly payments.

We know that the 10 yearly payments must reach 275,000 therefore S = 275,000.

We use the present value annuity due formula because we want to find the present value of a future sum (275,000). The trick to that question is "where the first payment is due at once" so this means you have to take into account one more payment with no interest (because you pay now, present value of the present is the same thing).

Therefore S = (1+r)^1 * R * [1-(1+r)^-n]/r

Therefore 275000 = (1.035)^1 * R * [1-(1+0.035)^-10]/0.035

You can solve for R by moving (1.035)^1 over to the other side then switching S and R by swapping [1-(1+0.035)^-10] and r.

Therefore R = 275000/(1.035)^1 * r/[1-(1+0.035)^-10]