Terry's father loaned her $15,000 for college expenses. Terry agreed to repay the $15,000 in a lump sum 5 years after graduation. No interest was to be charged. Terry, who is now a senior, has the prospects of marrying a rather wealthy man and wishes to repay the loan on graduation day. Assuming that father can invest the money at 12% interest, how much should he be willing to accept on graduation day rather than waiting 5 years for his money

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Business

Camron Davis

13 June, 17:44

Terry's father loaned her $15,000 for college expenses. Terry agreed to repay the $15,000 in a lump sum 5 years after graduation. No interest was to be charged. Terry, who is now a senior, has the prospects of marrying a rather wealthy man and wishes to repay the loan on graduation day. Assuming that father can invest the money at 12% interest, how much should he be willing to accept on graduation day rather than waiting 5 years for his money

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Answers (1)

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Melina Fitzgerald · Answer 1

PV = $8,511.40

Explanation:

Giving the following information:

Final value = 15,000

Number of years = 5 years

Interest rate = 12%

We need to calculate the present value of the $15,000. We will use the following formula:

FV = PV * (1+i) ^n

Isolating PV:

PV = FV / (1+i) ^n

PV = 15,000/1.12^5

PV = $8,511.40