1. This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous leader. You want to borrow $20,000 for one year. The interest rate is 15. 7 percent. You and the leader agree that the interest on the loan will be .157 x $20,000 = $3,140. So the lender deducts this interest amount from the loan up front and gives you $16,860. In this case, we say that the discount is $3,140. What's wrong here?
2. Calculating Discounted Payback - An investment project costs $17,500 and has anual cash flows of $4,300 for six years. What is the discounted payback period if the discount rate is 0 percent? What is the discount rate is 10 pecent? If it is 17 percent?