A real estate investor feels that the cash flow from a property will enable her to pay a lender $20,000 per year, at the end of every year, for eight years. How much should the lender be willing to loan her if he requires a 7.5% annual interest rate (monthly compounded, assuming the first of the eight equal payments arrives one year from the date the loan is disbursed) ?

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Business

Abbey Hayden

17 August, 16:27

A real estate investor feels that the cash flow from a property will enable her to pay a lender $20,000 per year, at the end of every year, for eight years. How much should the lender be willing to loan her if he requires a 7.5% annual interest rate (monthly compounded, assuming the first of the eight equal payments arrives one year from the date the loan is disbursed) ?

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Cruz Henry · Answer 1

The lender should be willing to loan her $117146

Explanation:

Rate of return, r = 7.5% = 0.075

Cash flow at the first year, CF = 20,000

Number of years, n = 8

Present value, PF = ?

PF = (CF[ ((1+r) ^n) - 1]) / (r (1+r) ^n)

PF = (20000[ (1+0.075) ^8-1]) / (0.075 (1+0.075) ^8)

PF = (20000[ (1.075) ^8-1]) / (0.075 (1.075) ^8)

PF=$117146