You need to borrow $2,000 quickly, and the local pawn shop will give it to you if you promise to repay them $200.92 monthly over the next year.

Suppose that the pawn shop's cost of funds is 12%, compounded monthly. From its viewpoint, what is the NPV of this deal?
A) $44.11
B) $111.01
C) $226.17
D) $261.37
E) $292.01

Question

You need to borrow $2,000 quickly, and the local pawn shop will give it to you if you promise to repay them $200.92 monthly over the next year.

Suppose that the pawn shop's cost of funds is 12%, compounded monthly. From its viewpoint, what is the NPV of this deal?
A) $44.11
B) $111.01
C) $226.17
D) $261.37
E) $292.01

Quizplus · Accepted Answer

The NPV (Net Present Value) from the pawn shop's viewpoint can be calculated using the formula for NPV, which involves discounting the monthly payments back to their present value at the pawn shop's cost of funds rate (12% compounded monthly). Given the monthly payment of $200.92 over 12 months and a discount rate of 12%/12 = 1% per month, the NPV can be calculated using a financial calculator or NPV formula in Excel. The correct NPV, given these parameters, is $261.37, which matches choice D. This value represents the net gain to the pawn shop from this deal, after accounting for its cost of funds.

You Need to Borrow $2,000 Quickly, and the Local Pawn