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4 July, 17:16

Your parents are giving you $220 a month for 4 years while you are in college. At an interest rate of. 51 percent per month, what are these payments worth to you when you first start college?

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  1. 4 July, 20:44
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    These payments worth $9,346 to me when I first start college.

    Explanation:

    A fix Payment for a specified period of time is called annuity. The discounting of these payment on a specified rate is known as present value of annuity. In this question the monthly payment of $220 for 4 years at 0.51% per month is an annuity.

    Formula for Present value of annuity is as follow

    PV of annuity = P x [ (1 - (1 + r) ^-n) / r ]

    Where

    P = Annual payment = $220

    r = rate of return = 0.51%

    n = number of months = 4 years x 12 months each year = 48 months

    PV of annuity = $220 x [ (1 - (1 + 0.0051) ^-48) / 0.0051 ]

    PV of annuity = $9,345.76 = $9,346
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