A friend of Seth’s who is a real estate developer needs to borrow $80,000 to finish development project. He is desperate for cash and offers Seth 18%, compounded monthly, for 2 ½ years. Find the future value of the loan using the future value liable. Does this loan meet Seth’s goals of low risk? How could he reduce the risk associated with this loan?
can't figure this out please somebody help me i'm not good at math how do i do the calculations
Loan amount (PV) $80,000.00
Interest rate (compounded monthly) 18%
Years 2.50
Therefore, rate = 1.50%
n = 30.00
Future value of loan = $125,046.42
To find the future value of the loan, we can use the formula for compound interest:
FV = P * (1 + r/n)^(nt)
Where:
FV is the future value of the loan
P is the principal amount (initial loan amount)
r is the annual interest rate (converted to decimal)
n is the number of times interest is compounded per year
t is the number of years the money is invested
First, we need to convert the annual interest rate to a decimal by dividing it by 100:
r = 18% = 0.18
Next, we need to determine the values for n and t based on the given information:
n = 12 (compounded monthly, so 12 times per year)
t = 2.5 (2 ½ years)
Now, we can substitute the values into the formula and calculate the future value:
FV = 80,000 * (1 + 0.18/12)^(12*2.5)
Calculating this expression will give us the future value of the loan.
To determine if this loan meets Seth's goals of low risk, we need to consider a few factors. The annual interest rate of 18% is relatively high, which suggests a higher level of risk. Additionally, the loan period of 2 ½ years is not very long, which can further increase the risk. However, without additional context on Seth's risk tolerance and investment goals, it's difficult to determine if this loan is within his goals.
To reduce the risk associated with the loan, Seth could consider:
1. Negotiating a lower interest rate: Seth can talk to his friend and try to negotiate a lower interest rate, which would reduce the total interest paid and potentially make the loan more attractive.
2. Asking for additional collateral: Seth can request additional assets or collateral to secure the loan, which would provide some protection in case the developer fails to repay.
3. Conducting due diligence: Seth should thoroughly evaluate the developer's financial stability, project plans, and the potential market for the finished development to assess if it's a sound investment.
4. Seek legal advice: Seth can consult with a lawyer to ensure the loan agreement is legally sound, includes appropriate provisions to protect his interests, and follows all applicable regulations.
By implementing these measures, Seth can reduce the risk associated with the loan and make a more informed decision.