Suppose that Sidney runs a micro financing agency that lends money to people to start small businesses in poor countries. Sidney lends at an interest rate of 8 8 % a year. She is currently working out the details to lend Noah and Eliza some money. Sidney arranges for all of her clients to repay her one lump sum of $10,000 at the conclusion of the term of the loan. The amount of money that she lends them depends upon the interest rate and the amount of time before repayment. Use the principle of present value to answer the following questions.
1. Noah decides that he will be able to repay Sydney in 1 year. How much will he borrow from Sidney today so that he pays her back $10,000 in a year?
2. Eliza will need 2 years to repay the loan. How much will she borrow today so that she pays Sidney back $10,000 in 2 years?
3. Why are present value calculations used?
a. Many costs are not recoverable and should not be considered in making decisions.
b. A dollar today is not worth the same amount as a dollar a year from now.
c. The goal of any firm should be profit maximization.
d. Consumers often make irrational decisions.
