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Suppose Intr is annually compounded ' T2 S1 c$ y3 P5 ]. O& e8 p
Month 0 Mon. 8 Mon. 12
2 i/ [& O) [( B5 O& D* T3 ^Cash Principal X -750 -950
: }* W8 n7 |7 u8 Y) x2 OCash Intr (Should Pay) -X*9.5%*8/12 -(X-750)*9.5%*4/12 ( d) o) j h+ |( F0 x! l0 @
PV at mon 0 X -[750+X*9.5%*8/12] -[950+(X-750)*9.5%*4/12]
- ]( t" G8 d! f7 k+ ?+ ]) Z /(1+7.75%*8/12) /(1+7.75%*12/12)
! u5 h9 o9 N# }, e! F+ K/ f+ v: I: y2 Z
these 3 should add up to 0, i.e. NPV at month 0 is 0.
g3 ?5 J9 ^- K) N9 i : O/ K% T( g$ E, A) U! k
Conclusion X = 1729.8
4 w" W% V. Q$ Z$ m+ M 1 H, d3 R: ]* U
So, Initial borrowing was 1730 *(1+7.5%) 1859.5 approx. $1,860
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