Calculate Present Value, Knowing the Annuity, Interest and Time.

An investor holds a time payment purchase contract on some machine tools. The contract calls for the payment of $140 at the end of each month for a 5-year period. The first payment is due in one month. He offers to sell you the contract for $6800 cash today. If you otherwise can make 1% per month on your money, would you accept or reject the investor's offer?


SOLUTION

In this problem we are being offered a contract that will pay $140 per month for 60 months.We must determinewhether the contract is worth $6800, if we consider 1%permonthto be a suitable interes trate.

Using the uniform series present worth formula, we will computate the present worth of the contract.


It is clear that if we pay the $6800 asking price for the contract, we will receive less than the 1% per month interest we desire.We will, therefore, reject the investor's offer.

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