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    Time Value of Money

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    Pierre borrowed $100,000 from his grandfather for college expenses. The interest rate is to be 5% annually (and compounded annually). The plan is that he will graduate in four years and start making payments at the end of the fifth year.
    a. How much will Pierre owe just before he makes his first payment?
    b. If he wants to pay off the loan in 10 years, what would his annual payment be?
    c. How long would it take to pay off the loan after he graduates if he pays his grandfather $15,000 annually.

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    Solution Preview

    Please refer attached file for better understanding of formulas.

    a How much will Pierre owe just before he makes his first payment?
    Loan amount=PV=$100,000
    Annual Payment made=PMT=0
    Interest Rate=RATE=5%
    Number of periods=NPER=5
    Type of payment=0 Year End Payments
    Amount at the end of 5th Year=FV=?

    We can use FV function in MS Excel to get ...

    Solution Summary

    Solution determines the desired parameters by using the functions in MS Excel.