Question

John is 30 years old. He will receive two payments of $2500 each. The first payment will be an unknown number of years in the future. The second payment will be five years after the first payment. At an annual effective interest rate of I=5%, the present value of the two payments is $2606. Determine at what age John will receive the second payment.

Answer 1

16 years

Explanation:

Let us assume that he would received the first payment after t years

So

The following formula should be used

PV = P ÷ (1 + r)^t + P ÷ (1 + r)^t+5

$2,606 = $2,500 ÷ (1 + 0.05)^t + $2,500 ÷ (1 + 0.05)^t + 5

$2,606 = $2,500 ÷ 1.05^t (1 + 1 ÷ (1.05)^5)

1.05^t = $2,500 ÷ $2,606 (1.7835) = 1.71098

t = ln(1.71098) ÷ ln(1.05)

= 11

Therefore he would be received the second payment after

= 11 + 5

= 16 years