Your mom will lend you money so long as you agree to pay her back within five years and you offer to pay her the rate of interest that she would otherwise get by putting his money in a saving account. Based on your earnings and living expenses, you think you will be able to pay him 8000$ in one year and then 10000$ each year for the following next four years. If your mom would otherwise earn 5% per year on her savings how much you can borrow from her?
$ 41,390.00
| Borrowed amount will be present value of cash flow at discount rate of 5%. | ||||||
| Year | Cash Flow | Discount factor | Present Value | |||
| a | b | c=1.05^-a | d=b*c | |||
| 1 | $ 8,000 | 0.952381 | $ 7,619.05 | |||
| 2 | $ 10,000 | 0.907029 | $ 9,070.29 | |||
| 3 | $ 10,000 | 0.863838 | $ 8,638.38 | |||
| 4 | $ 10,000 | 0.822702 | $ 8,227.02 | |||
| 5 | $ 10,000 | 0.783526 | $ 7,835.26 | |||
| Total | $ 41,390.00 | |||||
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