Question

Exercise 3.11

You brother has asked you for a loan and has promised to pay back $7,000 at the end of three years. If you normally invest to earn 8 percent per annum, how much will you be willing to lend to your brother?

(Do not enter the $ sign in your answer, if you solve this problem with algebra round intermediate calculations to 6 decimal places, in all cases round your final answer to the nearest cent.)

Answer 1

The amount that would be willing to lend to the brother will be the present value of $7,000 discounted at 8% for three years

Here, we have Future value = $7,000

Annual Interest rate (r) = 8.00% per year

Number of periods (n) = 3 Years

Therefore, the Present Value = Future Value / (1 + r)ⁿ

= $7,000 / (1 + 0.08)³

= $7,000 / 1.259712

= $5,556.83

“Hence, the amount that would be willing to lend to your brother will be $5,556.83”