A person has to make two payments to pay off a debt. The first payment is due 3 years from now in the amount of $3,000 and the second payment is due 5 years after the first payment in the amount of $5,000. If the current interest rate is 18%, what amount of money paid today would pay off that debt?

A person has to make two payments to pay off a debt. The first payment is due 3 years from now in the amount of $3,000 and the second payment is due 5 years after the first payment in the amount of $5,000. If the current interest rate is 18%, what amount of money paid today would pay off that debt?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter4: Time Value Of Money

Section4.17: Amortized Loans

Problem 1ST

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Concept explainers

Amortized Loans

The term "amortization" refers to spreading the value of a loan or a debt over a series of regular payments or installments comprising of both the principal and interest amount. It generally involves the process where in the value of a loan or an intangible asset is written down over its maturity period.

Question

Give typing answer with explanation and conclusion

A person has to make two payments to pay off a
debt. The first payment is due 3 years from now in
the amount of $3,000 and the second payment is due
5 years after the first payment in the amount of
$5,000. If the current interest rate is 18%, what
amount of money paid today would pay off that debt?
3,000/1.18³ + 5,000/1.188
None of the above
(3,000 + 5,000)/1.188/2
O 3,000/1.183 + 5,000/1.185

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