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A real estate investor feels that the cash flow from a property will enable her to pay a lender $20,000 per year, at the end of every year, for eight years. How much should the lender be willing to loan her if he requires a 7.5% annual interest rate (monthly compounded, assuming the first of the eight equal payments arrives one year from the date the loan is disbursed)?

Answer :

Answer:

The lender should be willing to loan her $117146

Explanation:

Rate of return, r =7.5%= 0.075

Cash flow at the first year, CF = 20,000

Number of years, n = 8

Present value, PF = ?

PF=(CF[((1+r)^n) -1])/(r(1+r)^n )  

PF=(20000[(1+0.075)^8-1])/(0.075(1+0.075)^8 )  

PF=(20000[(1.075)^8-1])/(0.075(1.075)^8 )

PF=$117146

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