Question

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

Table solution Please!

Answer 1

This is present value calculation, where the first payment is made at the end of 4^th 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.

Answer: B