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Question
Solve the following :
A person purchases a television by paying ₹20,000 in cash and promising to pay ₹1,000 at end of every month for the next 2 years. If money is worth 12% p. a. converted monthly, find the cash price of the television. [(1.01)–24 = 0.7875]
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Solution
Person buys the television for ₹20,000 in cash.
∴ First payment = ₹20,000
Remaining value of the television was paid in monthly instalments of ₹1,000.
∴ C= ₹1,000,
The duration of monthly installments is of 2 years.
∴ n = 24
Rate of interest is 12% p.a.
∴ r = `(12)/(12)` = 1% p.m.
∴ i = `"r"/(100) = (1)/(100)` = 0.01
The amount is paid at the end of every month.
∴ It is an immediate annuity.
Now, to find sum of all instalments we have to find present value.
∴ P = `"C"/"i"[1 - (1 + "i")^-"n"]`
∴ P = `(1,000)/(0.01)[1 - (1 + 0.01)^24]`
= 1,00,000 [1 – (1.01)–24]
= 1,00,000 (1 – 0.7875)
= 1,00,000 x 0.2125
∴ P = ₹21,250
∴ Cash price of the television = First Payment + Present Value
= 20,000 + 21,250
= ₹41,250
∴ Cash price of the television is ₹41,250.
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For annuity due,
C = ₹ 20,000, n = 3, I = 0.1, (1.1)–3 = 0.7513
Therefore, P = `square/0.1 xx [1 - (1 + 0.1)^square]`
= 2,00,000 [1 – 0.7513]
= ₹ `square`
For an annuity due, C = ₹ 2000, rate = 16% p.a. compounded quarterly for 1 year
∴ Rate of interest per quarter = `square/4` = 4
⇒ r = 4%
⇒ i = `square/100 = 4/100` = 0.04
n = Number of quarters
= 4 × 1
= `square`
⇒ P' = `(C(1 + i))/i [1 - (1 + i)^-n]`
⇒ P' = `(square(1 + square))/0.04 [1 - (square + 0.04)^-square]`
= `(2000(square))/square [1 - (square)^-4]`
= 50,000`(square)`[1 – 0.8548]
= ₹ 7,550.40
