Question

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?

ADue PV =

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