Someone wants you to lend her $3000 today. She promises to pay you $1000 one yea

Question

Someone wants you to lend her $3000 today. She promises to pay you $1000 one year from today, $1050 two years from today and $1100 three years from today. Alternatively, you can earn 3% compounded annually by putting the money in a savings account. Should you lend her the money? Someone wants you to lend her $3000 today. She promises to pay you $1000 one year from today, $1050 two years from today and $1100 three years from today. Alternatively, you can earn 3% compounded annually by putting the money in a savings account. Should you lend her the money? Someone wants you to lend her $3000 today. She promises to pay you $1000 one year from today, $1050 two years from today and $1100 three years from today. Alternatively, you can earn 3% compounded annually by putting the money in a savings account. Should you lend her the money?

Explanation / Answer

Amount Lent = 3000
Amount received = 1000 for 1st year , 1050 for 2nd year and 1100 for 3 rd year
Hence
3000 = 1000/(1+r) + 1050/(1+r)2 + 1100/(1+r)3
USing Excel

Rate = 2.44% which is less than 3 % Hnce you shoudl not lend the money.

PV of Future Cash at 3% = 1000/(1+r) + 1050/(1+r)2 + 1100/(1+r)3 = 1000/(1+3%) + 1050/(1+3%)2 + 1100/(1+3%) 3
= 2967.26
This PV is less than 3000 Hence amount should not be lent

Best of Luck. God Bless
Please Rate Well

A B C D Year 1 2 3 1 Cash Flow -3000 1000 1050 1100 IRR 2.44% =IRR(A1:D1)

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