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Math Help - Compound interest at changing interest rates

  1. #1
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    Compound interest at changing interest rates

    A young couple owns a block of land worth $29000. They are offered 20% deposit and 2 equal payments of $15000 at the end of years 2 and 4. If money is worth J2=8% for the first 2 years and J4=12% for the next 2 years, should they accept the offer?

    I tried [2*(15000)*(1.04^-4)(1.03^-8)]+(29000*.2) answer comes out to 26043.71 so they should not accept, but i think ive skipped some things and done something wrong, the answer in the back says they shouldnt accept but i think i still messed up somehow. Any help is appreciated thanks, teerplid.
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  2. #2
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    PV = $29,000x20% + $15,000(1+8%)^-2 + $15,000(1+12%)^-4
    PV = $5,800 + $15,000(0.85734) + 15,000(0.635518)
    PV = $5,800 + $12,860.08 + $9,532.77
    PV = $27,192.85
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  3. #3
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    Quote Originally Posted by dexteronline View Post
    PV = $29,000x20% + $15,000(1+8%)^-2 + $15,000(1+12%)^-4
    PV = $5,800 + $15,000(0.85734) + 15,000(0.635518)
    PV = $5,800 + $12,860.08 + $9,532.77
    PV = $27,192.85
    Not quite; the 2nd $15,000 needs to be discounted at both rates; this way:

    PV = .20(29000) + 15,000(1.08^-2) + 15,000(1.12^-2)(1.08^-2) = 28912.06
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