In: Accounting
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.)
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 |