Barry and Steve are good friends. Barry wants to buy a new computer, but he doesn't have the money for it.....

Question

Continued....Please consir the following scenario:

Barry and Steve are good friends. Barry wants to buy a new computer, but he doesn't have the money for it right now. Barry says that he will pay Steve $2,000 in five years if Steve gives him $1,600 for the computer today.
Steve figures that there's an interest rate of 6% if he were to put the money in a bank instead of lending it to Barry.
Assuming that there is no risk of Barry not paying the $2,000 when he says he will, should Steve go through with the loan or should he put his money in the bank? Explain your answer.
Thanks

Answer 1

If Steve puts the money in the bank:
$1600 + 6% = $1696.00 at end of year one.
$1696.00 + 6% = $1797.76 at end of second year.
$1797.76 + 6% = $1905.63 at end of third year.
$1905.63 + 6% = $2019.97 at end of fourth year.
$2019.97 + 6% = $2141.17 at end of fifth year.

If Steve lends money to Barry:
He will be out $1600 for the next four years, then will recieve $2000 in the fifth year.

Financially, I would advise Steve put his money in the bank. His returns will be much greater; however, morally, I would advise Steve to lend the money to Barry since Barry is a friend and the payment is guaranteed. What's an extra $141.17 over five years compared to the value of a good friendship?

Answer 2

1. Money exchanged among friends changes the friendship.

2. Where is Steve getting a 6% interest rate at? Even Money Market Accounts and CDs top out around 5% APY.

3. Will Steve need the $2k at some point? If it's in a bank he'll have access to it (even if it's tied up in a CD or something similar).

4. Barry can get a better rate of interest by taking out a small personal loan.

5. Barry shouldn't buy things he can't afford.

6. Will Steve get payments over the 5 years or will he have to wait the full 5 years before seeing any return on this loan?

7. There's always risk when money is involved.

Steve will get a better rate of return by putting it in the bank (if he can get 6%) over 5 years:

Interest earned on an initial deposit of $1600:
(Interest compounded annually)

Initial Deposit: $1600.00
yr 1 Interest: $96.00
yr 1 total: $1696.00
yr 2 Interest: $101.76
yr 2 total: $1797.76
yr 3 Interest: $107.87
yr 3 total: $1905.63
yr 4 Interest: $114.34
yr 4 total: $2019.96
yr 5 Interest: $121.20
yr 5 total: $2141.16

Answer 3

well seeing as this is not a business and finance question and should be posted in the homework section, i will not answer the question for you. I will however do my best to help you find the answer. If Steve were to put 1600 dollars in the bank you say it would earn 6% interest over the 5 years so your first step is to figure out what 6% of 1600 is. Since of means times your equation would be 6/100 x 1600/1. That will give you the amount of interest that the money will earn in the bank. If you add that number to the original 1600 you will see how much steve will have after 5 years if he put the money in the bank.
good luck

Answer 4

It just depends on if Steve can spare the money for five years, princess. The computer is going to be "shot" in five years and Barry is going to need another (who knows how much they'll cost then) loan for another computer as soon as he pays Steve back the original loan. And then again, in five years Barry may be able to make his own purchase on a new computer without Steve's help. I hope this makes sense. I had to take part of my answer out because I forgot that you said they were "good" friends.

Answer 5

At my calculations if Steve banks the money he would reap a
final total of 2019.97 in 5 years . So I guess the Bank is the best option.

I came up with this by .....taking 1600 for the first year x 6%
then add that interest to the balance and X 6 % for the second year and so on until you have 5 years worth.

Answer 6

If steve puts the money in the bank instead of giving it barry, how will barry buy the computer?

Answer 7

lol you know what this really needs to go in the homework section cause this is a homework question but if its not and if its not and they are good friends then steve should lend barry the money cause thats what friends are for to help each other out when they get in a jam!!

Answer 8

never lend friends money unless you dont expect it back. money between friends can destroy a relationship, even if barry has every intention of giving the money back, who is to say what will hapen in life and if he will be able to pay when the time comes. if you cant afford it then you can live without it for a while

Answer 9

$1600 * 0.25 = $400
$1600 + 400 = $2000
$400 is 25% interest on $1600.

Steve should go through with the loan because he can get 25% interest instead of 6% interest.

Answer 10

If he put it in a bank for the rate of 6% for 5 years he would get $408.00.

if his friend give him the money he will get $304.00 more than if he put it into a bank.

This leave $176 more if he put in the bank.

But he would probably loose a friend