You are negotiating to make a 4-year loan of $25,000 to Bala Inc. To repay you,

Question

You are negotiating to make a 4-year loan of $25,000 to Bala Inc. To repay you, Bala will pay $5,000 at the end of Year 1, $6,000 at the end of Year 2, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 3 to Year 4. Bala is essentially riskless, so you are confident the payments will be made. You regard 8% as an appropriate rate of return on a low risk but illiquid 4-year loan. What cash flow must the investment provide at the end of each of the final 2 years, that is, what is X? (Note: 1.5X credit) $9,959.26 $8.126.88 $9.679.25 $8 486.94

Explanation / Answer

Loan amount = Year 1 Payment/( 1+r) + Year 2 Payment/( 1+r)2 + Year 3 Payment/( 1+r)3 + Year 4 Payment/( 1+r)4
25000 = 5000/(1+8%) + 6000/(1+8%)2 + x/(1+8%)3 +x/)(1+8%)4
25000 -5000/1.08 -6000/1.082 = x/1.083 + x/1.084
15226.3374 = 1.52886x
x = 9959.26

Best of Luck. God Bless

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