The annual effective interest rate is 10% compounded monthly. Deal A: You give m

Question

The annual effective interest rate is 10% compounded monthly.
Deal A: You give me $4000 today and I pay you back $2000 in 1 year, and $4000 in 2 years.
Deal B: I give you $2000 today and another $4000 in 1 year and you pay me $X in 2 years.
What does $X have to be for you to be indifferent between these two deals?
The annual effective interest rate is 10% compounded monthly.
Deal A: You give me $4000 today and I pay you back $2000 in 1 year, and $4000 in 2 years.
Deal B: I give you $2000 today and another $4000 in 1 year and you pay me $X in 2 years.
What does $X have to be for you to be indifferent between these two deals?
The annual effective interest rate is 10% compounded monthly.
Deal A: You give me $4000 today and I pay you back $2000 in 1 year, and $4000 in 2 years.
Deal B: I give you $2000 today and another $4000 in 1 year and you pay me $X in 2 years.
What does $X have to be for you to be indifferent between these two deals?

Explanation / Answer

Solution:

Net present value of Deal A = Present value of cash inflows - PV of cash outflows

= [$2,000*0.90909 + $4,000*0.82645) - $4,000 = $1,124

In order indifferent between these two deals, net present value of Deal B should also equal to $1,124

therefore

[$2,000 + $4,000*0.90909] - ($X * 0.82645) = $1,124

$5,636.36 - 0.82645X = $1,124

X =$5,460

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