Sachin has asked his flat mate Jason for a $450 loan to cover a portion of his r
ID: 2738145 • Letter: S
Question
Sachin has asked his flat mate Jason for a $450 loan to cover a portion of his rent and utility costs. Sachin proposes repaying the loan with $375 from each of his next two financial aid disbursements, the first 4 months from now and the second 13 months from now. Jason's alternative is to earn 6% annually in his money market account. Assume there is no risk of default, and that compounding is monthly. What is the NPV of the loan from Jason's perspective? (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)
Explanation / Answer
Principle Amount = 450
Interest = 6% p.a. or 0.5% per month
Time = 4 month and 13 month
Repayment amount = 375
Present value = A(1+i)^-n
Present Value of repayment at 4 month = 375*(1+0.5%)^-4 = 367.5928
Present Value of repayment at 4 month = 375*(1+0.5%)^-13 = 351.4572
Total present value of repayment = 719.05
Less: Principle amount = 450
Net Present value(NPV) = 719.05 or $719
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