Megan’s Aunt Karroll told her that she would give Megan $1000 at the end of each year for the next three years to help with her college expenses. Assuming an annual interest rate of 2 percent,...

Megan’s Aunt Karroll told her that she would give Megan $1000 at the end of each year for the next three years to help with her college expenses. Assuming an annual interest rate of 2 percent, what is the present value of that stream of payments?

Expert Answers
steveschoen eNotes educator| Certified Educator

The formula for this is:

P = A[`((1+i)^n - 1)/(i(1+i)^n)`]

Plugging the numbers in: A = 1000, i = 0.02,n = 3, we get:

P = 1000[2.88388] = $2883.88

pi-baker | Student

If we are talking about a simple interest rate, then the equation is I=prt where,

I = interest earned

p = principle balance

r = interest rate (converted into a decimal)

t = time in years

So for your problem

I=prt

I=1000(.02)(3)

I=60

So Megan would earn $60 in interest over the three years, assuming she doesn't actually use any of the money during that time, rather it stays in the bank accumulating interest.