Geometric Progression?

Q: What is the present value of

a. £1200 a year receivable from the end of year 3 to the end of year 7 at an interest rate of 20 percent a year?

b. £4000 a year payable from the end of year 5 to the end of year 10.

The way I've looked at this question is that the answer could be derived from geometric progression.

For part a given it asks the present value of £1200 recievable from Y3 To Y7, I would base my starting point there.

So Y3 PV = 1200*(1/1.2^3)

Then you progress by 4 years to find the PV of the income attained during the 4 year time period:

1200/1.2^3*(1-1/1.2^4)/(1-1/1.2) = £2157.28 (2 d.p)

Part b is essentially the same thing from my understanding using different numbers so your formula would be:

4000/1.2^5*(1-1/1.2^5)/(1-1/1.2) = £5768.93 (2 d.p)

Am I off on a tangent or does this make sense?

Reply 1

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