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At an effective annual interest rate of i , i>0 , the following two sets of payments have the same present value:

(i) A payment of 64 immediately and another payment of 64 at the end of 1 year

(ii) A payment of 125 at the end of 3 years and another payment of 125 at the end of four years

Compute the effective rate of discount d equivalent to i

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Answer #1

Calculation of effective rate of interest (r) + 125 (ltija 64+ 64 = 125 (lt :) (1+E) 3 By Hit & Irial Method Let i be 20% 64when we assumed i=20% but value of 1st set equation is lower than value of 2nd set. Therefore, we assumed (i) higher than 20 so as to reduce the value of 2nd set. This results, value of both equations become equal.

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