Hi all, A little confused on this question, in particular part i. It says to calculate the value of the payments of 1500 @ time 3, 4000 @ time 7 and 5500 @ time 10 as at time 5. My approach to this question would be accumulate payment 1 by two time periods. Then discount payment 2 and 3 by 2 and 5 time periods respectively. However this gives the incorrect answer and is different to the approach in the solutions - is the logic of what i have done wrong? Thanks
ie accumulated value of first payment = 1500(1.03)^2=1591.35 Second and third payments discounted to time 5 4000*1.05^-2 + 5500*1.08^-2*1.05^-3 =7701.42 so in total 1591.35+7701.42=9292.776 this answer does not match the solutions
You have used different interest rates for different payments. Is that correct? Your overall method sounds fine to me.
Hi Molly, Your general approach is correct but to accumulate the first payment from time 3 to time 5 you need to do 1500(1.03)(1.05) (the interest rate changes at time 4). This should give the same answer (subject to rounding). I always find that jotting down a quick timeline on a piece of paper helps with these types of questions - that's how i spotted the error. Thanks Michael
