Question

Your company, FireTech LLC, expects to receive a positive cash flow of $12 million in five years. Your company currently needs to borrow some money to purchase new equipment and plans on using this future cash flow to repay the loan. If the current interest rate is 6% and your company plans on using this future cash flow to pay off the loan balance in its entirety, what is the most your company can borrow today? (do not include any symbols, such as $, in your answer)

Answer 1

Answer:

8,967,120

Explanation:

Provided that, cash is expected to be received in 5 years.

Cash to be received = 12 million = $12,000,000

The current interest rate = 6%

Now, the future value at maximum can be  $12,000,000

We need to find the present value for such amount.

The discounted rate for present value of $1 @ 6% for 5 years = $\frac{1}{(1+0.06)^5} = 0.74726$

Therefore, discounted value, that is value of loan to be paid after 5 years having maximum value to be $12,000,000 = 0.74726 $\times$ 12,000,000 = 8,967,120