You need to borrow funds to pay for tuition.You are given three potential repayment options for the loan:

Pay $1,100 per year for 20 years starting in four years at graduation

Pay $1,150 per year for 12 years starting in one year

Pay $16,000 lump sum payment in 10 years

If your required return is 8%, which should you choose?

Answer:

1) FV = 0, N = 20, PMT = 1100, I/Y = 8, PV = ?

PV = -10,799.96, use as FV = 10,799.96, N = 3, PMT = 0, I/Y = 8, PV = ? = $8,573

2) FV = 0, N = 12, PMT = 1150, I/Y = 8, PV = ?

PV = $8,666

3) FV = 16,000, N = 10, PMT = 0, I/Y = 8, PV = ?

PV = $7,411

I am trying to understand why we are using the PV in the first option as a FV and where the N=3 comes from? I really would like to know the reasoning behind the calculation for each option.