Question

Your friend wants to borrow money from you. He proposes to repay his debt in 4 monthly installments of $100, starting this month (i.e., the first payment will occur at the end of month 1). If the monthly interest rate on your savings account is 1.5%, how much would you lend your friend at most? Round your result to the nearest cent, and do not use a $ sign (i.e., if the result is $1012.4671, enter it as 1012.47)...

Answer 1

We can use the present value of annuity formula to find this amount. Please note that the payment is monthly and interest rate is also given monthly rate. So the formula will be,

Where,
PV = Present value
A = Installment.
i = rate of interest
n = number of periods

i = 1.5% or 0.015

Substituting the values in the formula, we get:

So the amount you can lend today is $385.44