Your best friend will lend you $5,000 if you agree to pay back $5,540 in three y
ID: 2807938 • Letter: Y
Question
Your best friend will lend you $5,000 if you agree to pay back $5,540 in three years. Alternately, you can borrow from the bank at 3.36% interest. Should you borrow from your best friend or the bank?
Borrow from the bank at 3.36% interest as it is cheapest loan.
Borrow from your best friend interest as it is the cheapest loan.
Borrow from either one as the interest rate is the same.
Not enough information to work the problem.
Borrow from the bank at 3.36% interest as it is cheapest loan.
Borrow from your best friend interest as it is the cheapest loan.
Borrow from either one as the interest rate is the same.
Not enough information to work the problem.
Explanation / Answer
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
5540=5000*(1+r/100)^3
(5540/5000)^(1/3)=(1+r/100)
(1+r/100)=1.0348
r=(1.0348-1)*100
=3.48%(Approx).
Hence borrowings from bank must be made as it is cheapest loan.(A).
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