Sachin has asked his flat mate Jason for a $450 loan to cover a portion of his r
ID: 2738454 • Letter: S
Question
Sachin has asked his flat mate Jason for a $450 loan to cover a portion of his rent and utility costs. Sachin proposes repaying the loan with $375 from each of his next two financial aid disbursements, the first 5 months from now and the second 11 months from now. Jason's alternative is to earn 5% annually in his money market account. Assume there is no risk of default, and that compounding is monthly. What is the NPV of the loan from Jason's perspective? (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)
Explanation / Answer
1) Calculation of NPV From the perspective of Jason :
Annual interest rate of Jason = 5%
Monthly interest rate of Jason = 0.4167%
Pv of 1st installment = 367 (375/(1.004167)power to 5 = 375/1.021009)
Pv of 2nd installment = 358 (375/(1.004167)power to 11 = 375/1.04680)
Pv of interest on 1st installment = 9 (375*(1.004167)power to 6 /(1.004167)power to 11 =9.47/1.04680)
PV of Total cash inflow = 734
Less:Initial cash outflow = (450)
NPV = 284
Jason can invest his first installment of 375 in money market and can earn 5% annually on that investment.
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