Question

In: Accounting

Bart and Lisa each borrow $17,000 from their father Homer. Homer and Lisa have agreed that...

Bart and Lisa each borrow $17,000 from their father Homer. Homer and Lisa have agreed that she will repay her loan in full by paying $4,000 in two years and $15,000 in four years. Bart prefers to make the same payment of $

X in two and four years to fully repay his loan. Determine  X so that Bart and Lisa have the same effective interest rate (Round your answer to the nearest cent.)

Solutions

Expert Solution

Ans:

Please find attached answer in excel sheet. For any query please ask in comment box.

Year Cash flow
0 -17000
1 0
2 4000
3 0
4 15000
IRR 3.1660%
So effective rate of interest is 3.1660%
Now Bart has to pay equal amount in year 2 and 4 to repay with same effective rate of interest
Installment of Bart x(pv factor of 3.1660% for 2 years) + x(pv factor of 3.1660% for 4 years) = 17,000
Now Solving for X we have x(1/1.031660^2+1/1.031660^4) = 17000
X = 9328.628025

Formulas are as below:

Year Cash flow
0 -17000
1 0
2 4000
3 0
4 15000
IRR =IRR(B2:B6)
So effective rate of interest is 3.1660%
Now Bart has to pay equal amount in year 2 and 4 to repay with same effective rate of interest
Installment of Bart x(pv factor of 3.1660% for 2 years) + x(pv factor of 3.1660% for 4 years) = 17,000
Now Solving for X we have x(1/1.031660^2+1/1.031660^4) = 17000
X = =17000/1.82234729

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