Question

Find the amount to be paid at the end of 10 years which is equivalent to two payments of 100 each, the first to be paid immediately and the second to be paid at the end of 5 years. Assume 5% simple interest is earned from the date each payment is made and use a comparison date of the end of 10 years.

Answer 1

The amount to be paid at the end of 10 years which is equivalent to two payments of $100 each is $125.

Step-by-step explanation:

To find the amount to be paid at the end of 10 years which is equivalent to two payments of $100 each, we can calculate the future value using simple interest. The first payment of $100 is made immediately, so it does not earn any interest. The second payment of $100 is made at the end of 5 years and earns interest for the remaining 5 years. Using a simple interest rate of 5%, we can calculate the future value of the second payment by multiplying it by the interest rate and the time period: $100 × 0.05 × 5 = $25.

Now, we can calculate the total future amount by adding the first payment and the future value of the second payment: $100 + $25 = $125. This is the amount that should be paid at the end of 10 years to be equivalent to the two payments of $100 each.

It's important to note that simple interest does not take into account the accumulated interest from previous periods, so the future value is simply the sum of the principal and the interest earned during the specified time period.