Question

Today you borrow $10,500 to pay for your expected college costs over the next 4 years, including a master's degree. 2 years from now, you determine that you need an additional $4,700 so you borrow this additional amount. Starting 4 years from the original loan (2 years from the 2nd loan), you begin to repay your combined debt by making annual payments of $2,600. You will make these payments for 10 years. Draw a cash flow diagram of this situation from your perspective. The cash flow diagram can be first represented by end of year cash flows, Aj, for years, j =0,1,2...13. If there is no amount for a box enter 0. All boxes must be filled. If entering a negative number use negative (-) sign preceding the number.

Answer 1

The cash flow diagram can be represented as a timeline showing the loan amounts borrowed, additional loan, and repayments over the 13-year period.

Step-by-step explanation:

The cash flow diagram for this situation can be represented as follows:

1. 
   
3. Year 0: -10,500 (initial loan)
4. 
   
6. Year 1: 0 (no payment)
7. 
   
9. Year 2: 0 (no payment)
10. 
    
12. Year 3: 0 (no payment)
13. 
    
15. Year 4: 0 (no payment)
16. 
    
18. Year 5: 0 (no payment)
19. 
    
21. Year 6: -4,700 (additional loan)
22. 
    
24. Year 7: -2,600 (repayment)
25. 
    
27. Year 8: -2,600 (repayment)
28. 
    
30. Year 9: -2,600 (repayment)
31. 
    
33. Year 10: -2,600 (repayment)
34. 
    
36. Year 11: -2,600 (repayment)
37. 
    
39. Year 12: -2,600 (repayment)
40. 
    
42. Year 13: -2,600 (repayment)

In the cash flow diagram, negative values represent borrowed money and loan repayments, while zero values indicate no activity or payment for a particular year.