0

I need to compare two kinds of payments of a 750k debt. The first consists of 300k each year for 5 years. The second offers 20% discount (pay 600k) if payed at sight but then, I'd have to make a loan to have 600k (PMT = 246.348,93 for 5 years, or 1.231.744,65 in total). So the second option is better. But then it says "if I had 600k available in a short term investment with 14% annual rate", would my decision on how to pay change?

So, a short term investment would consist of 1 year or 5 years? I don't understand how this investment would change my decision.

Tomb
  • 15
  • "The first consists of 300k each year for 5 years." doesn't this add up to 1.5 million? there is also http://money.stackexchange.com/ which might be more appropriate – user190080 Nov 07 '16 at 14:40

1 Answers1

0

You are talking about very high interest rates compared to today, but let's go with that. You are now given a third option to repay the loan-withdraw the 600k and use it to repay the loan. You are probably expected to assume the investment will last as long as the loan, so 5 years. The balance at the end of 5 years would be $600\cdot 1.14^4 \approx 1155$ As that is less than the sum of payments on the loan and the loan payments come earlier, it is better to withdraw the money and replace it by saving the money you would have used for loan payments.

Ross Millikan
  • 374,822