Question

You have agreed to sell the business to your younger sister at the end of (5) years for $110k once she begins college.  Sketch a “Conceptual” Cash Flow Diagram and assume return on investment equivalent to 6% APR (nominal) with monthly compounding (i.e., 0.5%/month).   What is the minimum monthly income that yields this ROI?

Answer 1

Solution-

A = $ 148,373.52

A = P + I where
P (principal) = $ 110,000.00
I (interest) = $ 38,373.52

It worked out as below.

Compound Interest Equation

A = P(1 + r/n)nt

Where:

· A = Accrued Amount (principal + interest)

· P = Principal Amount

· I = Interest Amount

· R = Annual Nominal Interest Rate in percent

· r = Annual Nominal Interest Rate as a decimal

· r = R/100

· t = Time Involved in years, 0.5 years is calculated as 6 months, etc.

· n = number of compounding periods per unit t; at the END of each period

A = $ 148,373.52

A = P + I where
P (principal) = $ 110,000.00
I (interest) = $ 38,373.52

It worked out as below.

So it means total interest payment will be $ 38,373.52 over the course of 5 years which means monthly interest payment is $ 639.5586667 for 60 months approxmately.After 60 months capital of $ 110,000 will be returned.