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A promises to pay B a sum of rs. 200 at the end of 3 years and another rs. 400 at the end of 5 years from now. What immediate cash payment should B accept on the lieu of above payments, if interest is compounded 5% per annum ?
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A promises to pay B a sum of rs. 200 at the end of 3 years and another...
Solution:
Present Value of Future Payments:
Before we can calculate the immediate cash payment that B should accept in lieu of the future payments promised by A, we need to first calculate the present value of those future payments using the compound interest formula.
Formula: PV = FV / (1 + r) ^ n
where,
PV = Present Value
FV = Future Value
r = rate of interest
n = number of years
Calculation of Present Value:
1. The present value of the payment of Rs. 200 at the end of 3 years is:
PV = 200 / (1 + 0.05) ^ 3 = 166.39
2. The present value of the payment of Rs. 400 at the end of 5 years is:
PV = 400 / (1 + 0.05) ^ 5 = 308.18
Total Present Value = 166.39 + 308.18 = 474.57
Immediate Cash Payment:
In order to determine the immediate cash payment that B should accept in lieu of the future payments promised by A, we need to find the present value of the total payment that A is offering.
Formula: PV = FV / (1 + r) ^ n
where,
PV = Present Value
FV = Future Value
r = rate of interest
n = number of years
Calculation of Immediate Cash Payment:
1. The present value of the total payment of Rs. 600 (Rs. 200 + Rs. 400) is:
PV = 600 / (1 + 0.05) ^ 5 = 467.79
Therefore, the immediate cash payment that B should accept in lieu of the future payments promised by A is Rs. 467.79.
Explanation:
The concept of time value of money is used to calculate the present value of future payments. The time value of money is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
In this case, A is promising to pay B a certain amount in the future, but the value of that money will decrease over time due to inflation and the opportunity cost of not having that money available in the present. By calculating the present value of those future payments, we can determine the amount of money that B would need to invest today at a certain rate of interest in order to achieve the same future value.
By finding the present value of the future payments promised by A, we can determine the total value of those payments in the present. This allows us to compare that value to the amount of money that B would receive immediately in exchange for giving up those future payments.
In this case, the immediate cash payment that B should accept is Rs. 467.79, which is less than the total present value of the future payments promised by A. B should accept this amount because it represents the current value of the future payments and provides B with the opportunity to invest that money immediately to earn a return.
Present Value of Future Payments:
Before we can calculate the immediate cash payment that B should accept in lieu of the future payments promised by A, we need to first calculate the present value of those future payments using the compound interest formula.
Formula: PV = FV / (1 + r) ^ n
where,
PV = Present Value
FV = Future Value
r = rate of interest
n = number of years
Calculation of Present Value:
1. The present value of the payment of Rs. 200 at the end of 3 years is:
PV = 200 / (1 + 0.05) ^ 3 = 166.39
2. The present value of the payment of Rs. 400 at the end of 5 years is:
PV = 400 / (1 + 0.05) ^ 5 = 308.18
Total Present Value = 166.39 + 308.18 = 474.57
Immediate Cash Payment:
In order to determine the immediate cash payment that B should accept in lieu of the future payments promised by A, we need to find the present value of the total payment that A is offering.
Formula: PV = FV / (1 + r) ^ n
where,
PV = Present Value
FV = Future Value
r = rate of interest
n = number of years
Calculation of Immediate Cash Payment:
1. The present value of the total payment of Rs. 600 (Rs. 200 + Rs. 400) is:
PV = 600 / (1 + 0.05) ^ 5 = 467.79
Therefore, the immediate cash payment that B should accept in lieu of the future payments promised by A is Rs. 467.79.
Explanation:
The concept of time value of money is used to calculate the present value of future payments. The time value of money is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
In this case, A is promising to pay B a certain amount in the future, but the value of that money will decrease over time due to inflation and the opportunity cost of not having that money available in the present. By calculating the present value of those future payments, we can determine the amount of money that B would need to invest today at a certain rate of interest in order to achieve the same future value.
By finding the present value of the future payments promised by A, we can determine the total value of those payments in the present. This allows us to compare that value to the amount of money that B would receive immediately in exchange for giving up those future payments.
In this case, the immediate cash payment that B should accept is Rs. 467.79, which is less than the total present value of the future payments promised by A. B should accept this amount because it represents the current value of the future payments and provides B with the opportunity to invest that money immediately to earn a return.
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A promises to pay B a sum of rs. 200 at the end of 3 years and another rs. 400 at the end of 5 years from now. What immediate cash payment should B accept on the lieu of above payments, if interest is compounded 5% per annum ?
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A promises to pay B a sum of rs. 200 at the end of 3 years and another rs. 400 at the end of 5 years from now. What immediate cash payment should B accept on the lieu of above payments, if interest is compounded 5% per annum ? for B Com 2025 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about A promises to pay B a sum of rs. 200 at the end of 3 years and another rs. 400 at the end of 5 years from now. What immediate cash payment should B accept on the lieu of above payments, if interest is compounded 5% per annum ? covers all topics & solutions for B Com 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A promises to pay B a sum of rs. 200 at the end of 3 years and another rs. 400 at the end of 5 years from now. What immediate cash payment should B accept on the lieu of above payments, if interest is compounded 5% per annum ?.
A promises to pay B a sum of rs. 200 at the end of 3 years and another rs. 400 at the end of 5 years from now. What immediate cash payment should B accept on the lieu of above payments, if interest is compounded 5% per annum ? for B Com 2025 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about A promises to pay B a sum of rs. 200 at the end of 3 years and another rs. 400 at the end of 5 years from now. What immediate cash payment should B accept on the lieu of above payments, if interest is compounded 5% per annum ? covers all topics & solutions for B Com 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A promises to pay B a sum of rs. 200 at the end of 3 years and another rs. 400 at the end of 5 years from now. What immediate cash payment should B accept on the lieu of above payments, if interest is compounded 5% per annum ?.
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