You borrow $5000 today.The loan is due in 5 years,with interest at j₁ = 7%.It is agreed that you can instead pay $1000 one year from now,$X two years from now and $2000 three years from now.If money is worth j₄ = 8%,what is the value of X?

Question

Quizplus · Accepted Answer

The present value of the loan is $5000/(1+0.07)^5 = $3768.89. The present value of the payments is $1000/(1+0.08)^1 + X/(1+0.08)^2 + $2000/(1+0.08)^3 = $3768.89. Solving for X gives X = $2599.39.

You Borrow $5000 Today