If George borrows $12,000 from Cindy at 4.5% compound interest rate per year for
ID: 1224047 • Letter: I
Question
If George borrows $12,000 from Cindy at 4.5% compound interest rate per year for a period of three years, which of the following cash flow streams will be an acceptable equivalent (within $1,00 of amount loaned) to Cindy? (please show work)
Pay three equal payments of $4,365 at the end of each year for three years
Pay $4,540 at the end of year 1, $4,360 at the end of year 2, and $4,180 at the end of year 3
Pay one payment of $13,694 at the end of three years
Pay $540 at the end of each year for the first two years and $12,540 at the end of three years
a.Pay three equal payments of $4,365 at the end of each year for three years
b.Pay $4,540 at the end of year 1, $4,360 at the end of year 2, and $4,180 at the end of year 3
c.Pay one payment of $13,694 at the end of three years
d.Pay $540 at the end of each year for the first two years and $12,540 at the end of three years
Explanation / Answer
Principle amount is $12000
Interest in the first year is 12000*4.5%= $540
Interest in the second year is 540+(540*4.5%)=$564.3
Interest in the third year is 564+(564.3*4.5%) = $589.69
Total payable at the end of the third year = 12000+540+564.3+589.69=$13693.99
Thus the acceptable cash flow will be option c i.e Pay one payment of $13,694 at the end of three years