Question

At an effective annual interest rate of i > 0, each of the following two sets of payments has present value K: (i) A payment of 169 immediately and another payment of 169 at the end of two years. (ii) A payment of 225 at the end of two years and another payment of 225 at the end of four years. Calculate K.

Answer 1

Answer:

The present value of K is, $K=251.35$

Step-by-step explanation:

Hi

First of all, we need to construct an equation system, so

$(1)K=\frac{169}{(1+i)} +\frac{169}{(1+i)^{2}}$

$(2)K=\frac{225}{(1+i)^{2}} +\frac{225}{(1+i)^{4}}$

Then we equalize both of them so we can find $i$

$(3)\frac{169}{(1+i)} +\frac{169}{(1+i)^{2}}=\frac{225}{(1+i)^{2}} +\frac{225}{(1+i)^{4}}$

To solve it we can multiply $(3)*(1+i)^{4}$ to obtain $(1+i)^{4}*(\frac{169}{(1+i)} +\frac{169}{(1+i)^{2}}=\frac{225}{(1+i)^{2}} +\frac{225}{(1+i)^{4}})$, then we have $225(1+i)^{2}+225=169(1+i)^{3}+169(1+i)^{2}$.

This leads to a third-grade polynomial $169i^{3}+451i^{2}+395i-112=0$, after computing this expression, we find only one real root $i=0.2224$.

Finally, we replace it in (1) or (2), let's do it in (1) $K=\frac{169}{(1+0.2224)} +\frac{169}{(1+0.2224)^{2}}\\\\K=251.35$