An Assignable Loan Contract Executed Three Months Ago Requires Two

question 164

Short Answer

An assignable loan contract executed three months ago requires two payments to be paid five and ten months after the contract date. Each payment consists of a principal portion of $1,800 plus interest at 5% on $1,800 from the date of the contract. The payee is offering to sell the contract to a finance company in order to raise cash. If the finance company requires a return of 10%, what price will it be prepared to pay today for the contract?

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Definitions:

Profitability Index

A financial metric used to determine the desirability of an investment, calculated as the present value of future cash flows divided by the initial investment cost.

Crossover Rate

The rate at which two projects have the same net present value, used in capital budgeting to compare projects.

Mutually Exclusive

Situations or events that cannot occur at the same time, implying that the occurrence of one event excludes the occurrence of the other.

NPV

Net Present Value, a method to assess the profitability of an investment by comparing the present value of cash inflows to the present value of cash outflows.