Question

Green Forest Packaging just bought a new medical clinic. To pay for the medical clinic, the company took out a loan that requires Green Forest Packaging to pay the bank a special payment of 19,790 dollars in 5 month(s) and also pay the bank regular payments.   The first regular payment is expected to be 4,070 dollars in 1 month and all subsequent regular payments are expected to increase by 0.32 percent per month forever. The interest rate on the loan is 1.88 percent per month. What was the price of the medical clinic?

Answer 1

This question is an application of time value of money, which involves two types of cash flows. One is lumpsum amount that is paid in month 5 and second is a growing perpetuity. We need to calculate the PV of both of these cash flows (and add them) to calculate the price for medical clinic.

For lumpsum, we use basic time value of money function,

FV = PV * (1 + r)ⁿ

19790 = PV * (1 + 1.88%)⁵

PV = 19790/1.0976

PV = $18,030.22

For second perpetual cash flow,

PV = 260,897.44

Hence, total cost = 18030.22 + 260897.44 = 278,927.66

answered by: anonymous