A fund is to be donated by a wealthy man to provide annual scholarships to deserving students. The fund will grant P 5,000 each month for the first 5 years and P10,000 each month for another 5 years. If the fund earns a 12% interest p.a. compounded monthly, what is the amount of donation now.
A. P350,560
B. P365,890
C. P345,660
D. P472,230
Answers & Comments
Answer:
To determine the amount of the donation now, we need to calculate the present value of the scholarship payments, taking into account the interest earned at a rate of 12% per annum compounded monthly.The scholarship payments consist of two periods:First 5 years: P5,000 each month.Next 5 years: P10,000 each month.Let's break down the calculation into steps:
Explanation:
Step 1: Calculate the Future Value (FV) of the scholarship payments for the first 5 years, with a monthly contribution of P5,000: Using the future value formula for compound interest: [FV = P \times \frac{(1 + r/n)^{nt} - 1}{r/n}] Where:P = Monthly payment = P5,000r = Annual interest rate = 0.12 (12%)n = Number of times interest is compounded per year = 12 (monthly)t = Number of years = 5Calculate FV for the first 5 years: [FV_1 = 5000 \times \frac{(1 + 0.12/12)^{12 \times 5} - 1}{0.12/12}]Step 2: Calculate the Future Value (FV) of the scholarship payments for the next 5 years, with a monthly contribution of P10,000: Using the same formula with modified values:P = Monthly payment = P10,000r = Annual interest rate = 0.12 (12%)n = Number of times interest is compounded per year = 12 (monthly)t = Number of years = 5Calculate FV for the next 5 years: [FV_2 = 10000 \times \frac{(1 + 0.12/12)^{12 \times 5} - 1}{0.12/12}]Step 3: Calculate the total future value of both periods: [Total FV = FV_1 + FV_2]Step 4: Calculate the present value (PV) of the total future value using the formula for the present value of a single future amount: [PV = \frac{FV}{(1 + r/n)^{nt}}]Substitute the values and calculate the present value (amount of donation now).