You plan to borrow money from your grandmother to start a new chocolate candy business. You agree to make one payment of $100,000 at the end of 6 years and negotiate an interest rate of 7%. Your grandmother has offered to reduce either the interest rate or the number of years before the $100,000. Assuming your grandmother will lend you the present value of the final payment and that you want to borrow as much as possible today, which option would you prefer?

Question

Pamela Burnett

Business

10 April, 19:51

You plan to borrow money from your grandmother to start a new chocolate candy business. You agree to make one payment of $100,000 at the end of 6 years and negotiate an interest rate of 7%. Your grandmother has offered to reduce either the interest rate or the number of years before the $100,000. Assuming your grandmother will lend you the present value of the final payment and that you want to borrow as much as possible today, which option would you prefer?

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Hezekiah Kelly · Answer 1

future payment $100,000 in 6 years

agreed interest rate 7%

the present value of the $100,000:

PV = $100,000 / (1 + 7%) ⁶ = $66,634

if your grandmother really likes you and offers to either reduce the interest rate or the number of years, you should choose a reduction in the interest rate:

PV at 6% = $100,000 / (1 + 6%) ⁶ = $66,634

PV at 5% = $100,000 / (1 + 5%) ⁶ = $74,622

PV at 4% = $100,000 / (1 + 4%) ⁶ = $79,031

PV at 3% = $100,000 / (1 + 3%) ⁶ = $83,748

PV at 2% = $100,000 / (1 + 2%) ⁶ = $88,797

PV at 1% = $100,000 / (1 + 1%) ⁶ = $94,205

the less the interest rate, the higher the present value of the $100,000