A borrower will have two options for repaying a loan. The rst option is to make

Question

A borrower will have two options for repaying a loan. The rst option is to make a payment of $6; 000 on December 1, 2003 and a payment of $4; 000 on December 1, 2004. The second option is to make a single payment of $12; 000 N months after December 1, 2003. Assuming the two options have the same value on December 1, 2003, if the interest rate is annual eective rate of 5%, determine N. Use the NPV worksheet to compute the net present value seperately for each of the two options. (The calculator instruction is posted on Compass.)

Explanation / Answer

6000+4000v(1)=12000v(n) 6000+4000/(1.05)^1=12000/(1.05)^n solve for n, then multiply by 12 to get it in moths

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