The city of Springshire received an interesting offer from a local company. The
ID: 2441507 • Letter: T
Question
The city of Springshire received an interesting offer from a local company. The company would like the city to provide a loan of $3709662 to the company. In exchange, the company will repay the loan in the future. The company will begin making loan payments of $509781 to the city at the end of year 5. The company will make the loan payments for 14 years.
The city would like you to calculate how much the loan payments would be worth today, to make sure this is a wise investment of taxpayer dollars. Use an interest rate of 7% compounded annually to make the calculation.
Note: The city will receive the first loan payment at the end of year 5. The city will receive a total of 14 loan payments.
Explanation / Answer
Discounted value of loan payments at end of year 5 ($) = 509781 x P/A(7%, 14) = 509781 x 8.7455**
= 4458289.74
Discounted value of loan payments now ($) = 4458289.74 x P/F(7%, 14) = 4458289.74 x 0.3878**
= 1728924.76
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