Question

Your brother has asked you for a loan and has promised to pay you $7,100 at the end of three years. If you normally invest to earn 8.50 percent per year, how much will you be willing to lend to your brother if you view this purely as a financial transaction (i.e., you don’t give your brother a special deal)?

Answer 1

$5,559

Step-by-step explanation:

$7,100 is the future value of the loan which is paid by my brother. I have to calculate the present value of this value to determine the loan value by discounting at the rate of 8.5%.

Use following formula to calculate the present value of the amount.

Present value = Future value / ( 1 + r )^n

Where

r = rate of interest = 8.5%

n = numbers of years = 3 years

Future value = Loan amount paid back = $7,100

Placing values in the formula

PV = $7,100 / ( 1 + 8.5% )^3

PV = $5,558.65

PV = $5,559