A wealthy private investor had been approached by Union Finance Company on the previous day. It

seemed that Union Finance was interested in loaning money to one of its larger clients, but the client's

demands were such that Union could not manage the whole thing. Specifically, the client wanted to

obtain a loan for $$385,000,$ offering to repay Union Finance $$100,000$ per year over seven years. Union

Finance made the private investor the following proposition. Since it was bringing private investor

business, its directors argued, they felt that it was only fair for private investor to put up a

proportionately larger share of the money. If investor would put up $60\%$ of the money $($$$231,000),$ then

Union would put up the remaining $40\%($$$154,000).$ They would split the payments evenly, each getting

$$50,000$ at the end of each year for the next seven years.

Questions

Union Finance can usually earn $18\%$ of its money. Using this interest rate, what is the net

present value of the client's offer to Union?

The private investor does not have access to the same investments as the Union. In fact, the

best available alternative is to invest in a security earning $10\%$ over the next seven years. Using

this interest rate, what is the private investor's net present value of the offer made by the

Union? Should the private investor accept the offer?

What is the net present value of the deal to the Union if the private investor participates as

proposed?

Suppose they split the $$385,000$ in half and Union receives $$100,000$ for the first $3$ years and

Briggs receives $$100,000$ per year for years $4-7.$ Which of these two investors is more patient?

Which of these two investors is more profitable?