A Present Value Calculations (Show/Explain your work as best as you can, at leas
ID: 2713944 • Letter: A
Question
A Present Value Calculations (Show/Explain your work as best as you can, at least show your inputs and state what you use for calculations)
A.) Dr. Ima N. Pain has a patient that had $3,000 in services done. The customer cannot pay until a year from now. Dr. Ima earns a 5% return on her money. How much should she charge the patient if the patient will pay the bill in one year?
B.) Dr. Pain has another patient that can only pay $300/month. If he makes monthly payments for one year, and Dr. Pain invests them at a 3% annual rate, what is the present value of the monthly payments? The payments will start one month from today.
C. Dr. Pain realizes that her 3% return is a monthly compounded rate. What is the effective annual rate (EAR)?
Explanation / Answer
A)she charge the patient if the patient will pay the bill in one year= $3,000*(1.05)=$3150
B)
Let MB0=Present Value of monthly payments, MP=monthly pay=300, r be the current market rate of interest=3% or 3/12%=.25% per month, T be time to maturity=1*12=12 months
MB0=(MP/r)(1-1/(1+r)T)
the present value of the monthly payments=(300/.0025)*(1-(1/(1.0025)12)) =$3542.18
C) the effective annual rate (EAR) = ((1.0025)12 -1)= 0.03042 or 3.042%