Question

# Suppose you borrow money from your parents for college tuition on January 1, 2015. Your parents...

Suppose you borrow money from your parents for college tuition on January 1, 2015. Your parents require four annual payments of \$10,000 each, with the first payment due on January 1, 2019. They are charging you 6% annual interest. What is the cost of the college tuition? A. \$27,447 B. \$29,094 C. \$15,939 D. \$40,000

This is present value calculation, where the first payment is made at the end of 4th year. Three other payments are made in subsequent years.

 Year Cash flow, CF 6% factors (F) = 1 / 1.06 ^ year CF × F 1 0 1/1.06 ^1 = 0.94339 0 2 0 1/1.06^2 = 0.88999 0 3 0 0.83961 0 4 -10,000 0.79209 -7920.9 5 -10,000 0.74725 -7472.5 6 -10,000 0.70496 -7049.6 7 -10,000 0.66505 -6650.5 Total = -29093.5

Note: Since there are payments, all cash flows are in negative signs.

The present value is -29,093.5, which is rounded to -29,094.

The cost of tuition is \$29,094.

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