Otto Co. borrows money on April 30, 2016, by promising to make four payments of

Question

Otto Co. borrows money on April 30, 2016, by promising to make four payments of $23,000 each on November 1, 2016; May 1, 2017; November 1, 2017; and May 1, 2018. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round "Table Factor" to 4 decimal places.)

1. How much money is Otto able to borrow if the interest rate is 4%, compounded semiannually?

2. How much money is Otto able to borrow if the interest rate is 8%, compounded semiannually?

3. How much money is Otto able to borrow if the interest rate is 10%, compounded semiannually?

Explanation / Answer

Payments will be done every 6 months and since interest is compounded semi annually each 6 month period will be considered as 1 period for the calcuation of present value

Since interest is compounded semi annually interest will be divided by 2 to arrive at semi annual interest

Answer 1)

If interest rate is 4% comounded sem annually then Otto will be able to borrow $87,577.76

Answer 2)

If interest rate is 8% comounded sem annually then Otto will be able to borrow $83,487.59

Answer 3)

  If interest rate is 10% comounded sem annually then Otto will be able to borrow $81,556.86

Dates Period Cash Flow Pv factor = 1/(1+r)^n PV A B A x B Apr 30, 2016 0 Nov 1, 2016 1 23000 1/(1+0.02)^1 0.9804 22549.02 May 1, 2017 2 23000 1/(1+0.02)^2 0.9612 22106.88 Nov 1, 2017 3 23000 1/(1+0.02)^3 0.9423 21673.41 May 1, 2018 4 23000 1/(1+0.02)^4 0.9238 21248.44 87577.76

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