Marilyn Ho borrowed $24,000 from Steward Financial Enterprises. She was required

Question

Marilyn Ho borrowed $24,000 from Steward Financial Enterprises. She was required to make sixteen equal payments of principal. These were to be made annually with the first payment due exactly one year after she received the $24,000. Ms. Ho also had to make annual payments of interest to the loan holder at an annual effective rate of 8.5%. Immediately after the loan is made, Brady Investment Corporation purchases the right to receive all of Ms. Ho's payments from Stewart Financial Enterprises. The price paid by Brady Investment Corp resulted in Brady having a 7% annual yield on their sixteen-year investment. Find the price that Brady Investment Corp paid Stewart Financial Enterprises

Explanation / Answer

$ 26,106

Working:

Loan disbursement schedule: Years Beginning Outstanding Interets for the year (8.5%) Principal Payment Ending outstanding Total Cash flow Discount factor (7%) Present value 1 24000 2,040 1500 22500 3,540 0.935 3,308 2 22500 1,913 1500 21000 3,413 0.873 2,981 3 21000 1,785 1500 19500 3,285 0.816 2,682 4 19500 1,658 1500 18000 3,158 0.763 2,409 5 18000 1,530 1500 16500 3,030 0.713 2,160 6 16500 1,403 1500 15000 2,903 0.666 1,934 7 15000 1,275 1500 13500 2,775 0.623 1,728 8 13500 1,148 1500 12000 2,648 0.582 1,541 9 12000 1,020 1500 10500 2,520 0.544 1,371 10 10500 893 1500 9000 2,393 0.508 1,216 11 9000 765 1500 7500 2,265 0.475 1,076 12 7500 638 1500 6000 2,138 0.444 949 13 6000 510 1500 4500 2,010 0.415 834 14 4500 383 1500 3000 1,883 0.388 730 15 3000 255 1500 1500 1,755 0.362 636 16 1500 128 1500 0 1,628 0.339 551 Total of present value                26,106

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