Ask Question
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?

+2
Answers (1)
  1. 10 April, 20:07
    0
    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
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “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 ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers