# Present value

1. Feb 28, 2006

### beanryu

A business associate who owes you 7200 dollars offers to pay you 6720 now, or else pay you three yearly installments of 2400 each, with the first installment paid now. Assume that the interest rate will be 6 percent (compounded continuously). If you use only financial reasons to make your decision, which option should you choose?

Justify your answer, by computing the present value of the 3 installments.

how do I do this?!
I tried
3
S 2400*e^(-0.06*t)
0

2
S 2400*e^(-0.06*t)
0
S=integral sign.
but both of them is not correct!!!

2. Feb 28, 2006

### KingNothing

Is the $2400 really$2400 plus interest? Also double-check the "now" amount, becuase even three payments of $2400 without interest is$7200.

The second payment would be 2400 + interest for one year on the remaining 4800:

$$A=4800 \cdot e^{6*2}$$

3. Feb 28, 2006

### beanryu

are you suggesting the answer would be

2
S 2400*e^(-0.06*t)+2400(the installment paid now)
0

4. Mar 1, 2006

### KingNothing

No. I am suggesting that the second installment would be $2400 plus interest for one year on the remaining$4800.

The big question here is, why is your rate -0.06? Your rate should be positive, a negative amount would indicate the payment 'decreasing continuously'.

5. Mar 1, 2006