Having taken a finance course, Ellie decides to go to the bank and borrow money

Question

Having taken a finance course, Ellie decides to go to the bank and borrow money using the inheritance ($1,000,000) as collateral. She negotiates a deal where she borrows $XXX,XXX. Then at age 40 she agrees to pay $1,000,000 to the bank. The $1,000,000 payment covers the original principal and all of the interest that accrued.

Assume the bank agrees to this deal with a 4.85% interest rate.

A) How much will Ellie be able to borrow?

B) How much interest will she pay when she pays the lump sum to close out the loan at age 40?

I'm a little lost as to how to set this up in excel. Thank you!!

Explanation / Answer

Period (Nper) = 40-25 = 15 years.

Future value = $1,000,000.

Interest = 0.0485.

Compute the present value.

=PV(rate, Nper, Pmt, FV)

=PV(0.0485,15,,-1000000)

=$491,443.

Therefore, the amount borrowed is $491,443.

Interest = $1,000,000-$491,443 = $508,557.

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