Suppose you are a loan officer for a bank. A start-up company has qualified for a loan. You are pondering various proposals for repayment:

1. Lump sum of £500,000 four years hence. How much will you lend if your desired rate of return is

(a). 12 per cent, compounded annually, and

(b). 16 per cent, compounded annually?

2. Repeat number 1 but assume that the interest rates are compounded semiannually.

3. Suppose the loan is to be paid in full by equal payments of £125,000 at the end of each of the next 4 years. How much will you lend if your desired rate of return is:

(a). 12 per cent, compounded annually, and

(b). 16 per cent, compounded annually?