Question

You borrow $21000 from a lender at 3.4% interest over a 5 year period.
List two ways and calculate the results that demonstrate financial equivalence for this problem.
How much will you pay over the life of the loan?

Answer 1

SOLUTION :-

Given,

Present value = $21000

Interest Rate (r) = 3.4% (assuming it to p.a.)

Time period (n) = 5 years

Two ways for the calculation of the future value is,

1) Simply pay at maturity that is after 5 years the whole amount.

2) Pay annually from 1st year for the period of 5 years

Calculation of the results that demonstrate financial equivalence for this problem :-

1) Future value = present value *

= $21000*

= $ 24821.155

OR

2) Annually $4,637.944 is to be paid till 5 years,adjusting the interest rates.

Calculation:-

Present value = Annual annuity amount *

Annual annuity amount = $21000*

= $ 21000* 0.2208

= $ 4,637.944

Therefore, the amount to be paid over the life of the loan can be paid via both of the alternatives stated above demonstrating the financial equivalence for this problem.