Your neighbour makes you the following offer. He would like to borrow $10,000 today. He will repay the $10,000 by making yearly payments with the first payment being for $1,000 at the end of this year. The payments will grow by 10% every year thereafter. If the appropriate discount rate is 12%, how long will it take for your neighbour to repay the loan?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the payments is equal to the loan amount. The present value of the payments is calculated as follows:PV = $1,000 / (1 + 0.12)^1 + $1,100 / (1 + 0.12)^2 + $1,210 / (1 + 0.12)^3 + ...The present value of the payments is equal to $10,000, so the loan will be repaid in 12.38 years.

Your Neighbour Makes You the Following Offer