Question

Lorna Ray, owner of a Starbucks franchise, loaned $40,000 to Lee Reese to help him open a new flower shop online. Lee plans to

repay Lorna at the end of 5 years with 4% interest compounded semiannually. How much will Lorna receive at the end of 5 years?

Answer 1

Answer:

Lorna will receive $48,759.777 at the end of 5 years

Explanation:

Here, we want to calculate future value or future amount;

Future value is the value of an asset at a specific date. Future value is calculated using the following formula;

A = PV[1+r/m]^mt

Where A = Amount (in future)

PV = Present value = $40,000

r = Interest Rate = 4%

t = Number of years = 5

m = Number of period based on compounding frequency

m = semiannually = 2 times a year = 2

By substitution

A = 40,000 * (1 + 4%/2)^(2 * 5)

A = $48,759.777

Lorna will receive $48,759.777 at the end of 5 years