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Putting the money in the bank

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You have just graduated and would like to buy a new car but you have no money. Your rich Aunt Amy, who is a retired investment banker at the age of 35 because she knew better, is willing to lend you the money to buy the car, as long as you promise to pay her back in four years. You propose to pay her the rate of interest she would otherwise get by putting the money in the bank, which has deposit and loan rates of 2% and 6%, respectively. Based on your projected income and living expenses, you anticipate that you will be able to pay her $30,000, $40,000, $45,000, and $50,000 at the end of each of the next four years, respectively.

(1) How much would your aunt have in four (4) years if she chooses not to lend you the money but deposit the money into the bank instead?

(2) How much would your aunt have in four (4) years if she chooses to lend you the money?

(3) Compare the answer from (1) & (2), you believe your aunt should be indifferent between lending you the money or putting the money in the bank. Discuss whether she would agree with your assessment.

Reference no: EM133070367

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