Financial deals. Five years ago, your favorite aunt won a $1,000,000 lottery. Th
ID: 2642148 • Letter: F
Question
Financial deals.
Five years ago, your favorite aunt won a $1,000,000 lottery. The prize money is paid out $50,000 per year for 20 years. Unfortunately, your aunt needs as much as $250,000 cash now to pay for medical bills that she and your uncle incurred as a result of an accident. A local finance company has proposed to provide her with the $250,000 cash in return for the $50,000 annual payments over the next 9 years.
What is the interest rate implicit in the local finance company proposal.
What advice would you give to our aunt.
Explanation / Answer
As per the question(given),
Total Loan Amount = $ 250,000
Annual payment = $ 50,000
Years = N = 9 year
Interest rate= i = ?
According to formula,
PVOA = PMT X PVOA factor for n= 9, i=?
Where,
PVOA= Present value of Annuity
PMT = Payment of loan
n= Number of years in which loan amount paid
i= interest rate
Putting the value in the formula.We have,
250,000 = 50,000 x PVOA factor for n=9, i
PVOA factor for n=9, i = 250,000 / 50,000
PVOA factor for n=9, i = 5.0000
By using of use a present value of an ordinary annuity table.We have,
PVOA factor for n=9, i = 5.5 %
Hence, Implicit interest of loan amount is 5.5%.
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