What would the interest rate, r need to be for these two payment plans to have...
What would the interest rate, r need to be for these two payment plans to have the same value:
- Receiving $600 in 4 years
- $275 today and $275 again in 4 years.
(Assume interest rates compound annually).
Homework Answers
Let the interest rate be r
Future value under both options will be same under both the plans
Future Value = Present value(1+Interest rate)^Number of years
600 = 275(1+r)^4 + 275
(1+r)^4 = 1.181818
r = 4.2648%
Hence, r = 4.26%
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