Suppose you are a loan officer for a bank. A start-up company has qualified for
ID: 2427777 • Letter: S
Question
Suppose you are a loan officer for a bank. A start-up company has qualified for a loan. You are pondering various proposals for repayment.
1. Lump sum of $250,000 fiver years hence. How much will you lend if your required rate of return is (a) 8%, compounded annually, and (b) 12%, compounded annually.
2. Repeat number 1, but assume that the interest rates are compounded semiannually.
3. Suppose the loan is to be paid in full by equal payments of $50,000 at the end of each of the next 5 years. How much will you lend if your required rate of return is (a) 8%, compunded annually, and (b) 12%, compounded annually?
Explanation / Answer
1. if repayment is five year hence.
a. 8% :
250000* present value factor @8% for 5 year
250000*.681 = $170146
b. 12%
250000*.567 = 141857
2.
a.
250000* pvf @4% for 10 years
250000*.676 = $168891
b.
250000* pvf@6% for 10year
250000*.558 = $139599
3.
a. 50000*3.993 = $199636
b. 50000*3.65 = $180239