Question

A local pizzeria buys a used car to make pizza deliveries. It pays $4,000 down and $4,000 a year for two more years. What is the present value of these payments at a 5% interest rate? The present value (PV) is PV=$ (Enter your response rounded to two decimal places.)

Answer 1

The present value of the payments is $11,120.10.

Step-by-step explanation:

The present value of the payments can be calculated using the present value formula. The formula is PV = P/(1+r)^t, where PV is the present value, P is the payment amount, r is the interest rate, and t is the time period. In this case, the payment amount is $4,000, the interest rate is 5%, and the time period is 3 years (1 year for the down payment and 2 years for the additional payments). Plugging these values into the formula, we can calculate the present value as follows:

For the down payment ($4,000): PV = 4,000/(1+0.05)^1 = $3,809.52

For the additional payments ($4,000 each year for 2 years): PV = 4,000/(1+0.05)^2 + 4,000/(1+0.05)^3 = $7,310.58

Adding up the present values of the down payment and additional payments, the total present value of the payments is $11,120.10.