Question

Question 1.

Part A: A firm has agreed to pay off a 10 year loan by making ten $4,000 annual payments starting next year and a $100,000 lump sum payment in 10 years. If the fair market interest rate is 6% how much can they borrow?

Part B: The firm instead decides they would rather make 10 equal annual payments starting next year with no lump sum in 10 years. What annual payments must they make to borrow the same amount as in Part A? The fair market interest rate is still 6%.

Answer #1

Part A

FV = 100,000

n = 10

PMT = 4,000

r = 6%

The firm can borrow $85,279.8258981785

Part B:

Annual payments must be $11,586.7958217262 with no lump sum in 10 years

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