Question

a friend who owes you money has offered to pay you back by making either one lump sum payment today or payments of 5000 in one year, 7500 in two years, and 10000 in three years. assume the discount rate is 5%.

A friend who owes you money has offered to pay you back by making either one lump sum payment today or payments of $5,000 in one year, $7,500 in two years, and $10,000 in three years. Assume the discount rate is 5%. What lump sum payment amount would be fair to both you and your friend?

Answer 1

Answer:

Lump sum payment will be $20,203.

Working Note:

Year	Repayment	Discount rate @ 5% = 1/(1+r)^n	Present Value
1	$    5,000.00	0.952	$    4,761.90
2	$    7,500.00	0.907	$    6,802.72
3	$ 10,000.00	0.864	$    8,638.38
		Total	$ 20,203.00