Present Value (1 Viewer)

[Paj20]

Rondell's House repayments are $700 a month. She is going overseas for 3 years. How much does she need to invest today at 9% p.a so that her son can withdraw $700 each month for the next 3 years to pay the house repayments?

Is the answer like $22012?

 

[Iruka]

The answer is indeed $22,012.76.

Iyounamu, you have forgotten that it is only the last $700 that will earn compound interest for the full three years.

You should be using the present value of an annuity formula, not the compound interest formula.

 

[PC]

Rondell's House repayments are $700 a month. She is going overseas for 3 years. How much does she need to invest today at 9% p.a so that her son can withdraw $700 each month for the next 3 years to pay the house repayments?

Isn't this just a normal present value question?

N = M[ (1+r)ⁿ–1 / r(1+r)ⁿ ]
= 700[ (1+0.0075)³⁶–1 / 0.0075(1+0.0075)³⁶ ]
= 700 x 31.44680525
= $22 012.76

 

[lyounamu]

The answer is indeed $22,012.76.

Iyounamu, you have forgotten that it is only the last $700 that will earn compound interest for the full three years.

You should be using the present value of an annuity formula, not the compound interest formula.

I thought this is the general maths. I thought they would not learn the annuity formula. Oh well, stupid of me to assume so. Thanks.

 

[Iruka]

They have a whole topic called Financial Mathematics in General Maths where they learn about annuities, compound interest, loan repayments and stuff like that.

There is a formula sheet available in the exam with all the finanacial mathematics formulas on it, so it is not necessary to memorize them, but you do need to know which formula to use when. Unlike 2 unit, you don't have to be able to derive them.