1. A. Present Value Calculations (Show/Explain your work as best as you can, at

Question

1. 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

present value = future value/(1+interest rate per period)^number of periods

a)

=>

3000 = future value/(1+5%)

=>

future value = 3150

b)

present value = 300 * [1-(1+3%/12)^-12]/3%/12

= 3542.18

c)

Effective annual rate = (1+ monthly rate)^number of periods in a year - 1

= (1+3%)^12 -1

= 42.58%

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