Question

You raise some money today from your friend. He agrees to loan you the money you...

You raise some money today from your friend. He agrees to loan you the money you need, if you make payments of $40 a month for the next one year. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2 percent interest per month. How much money are you borrowing?

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Homework Answers

Answer #1
Step 1: Immediate peyment = $40
Step 2: Present value of remaining payment
Present Value Of An Annuity
= C*[1-(1+i)^-n]/i]
Where,
C= Cash Flow per period
i = interest rate per period
n=number of period
= $40[ 1-(1+0.02)^-11 /0.02]
= $40[ 1-(1.02)^-11 /0.02]
= $40[ (0.1957) ] /0.02
= $391.47
Step 3: Amount of loan = $40+391.47
=$431.47
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