Paying off the loan with a single lump sum at the end of 10 years is preferable to 10 uniform annual payments. Since the return on investments is 12%, higher than the loan's 10% interest rate, investing the money and paying it back as a lump sum allows it to grow more over the full 10 years. Paying annually reduces the effective holding period of full growth compared to a single payment after 10 years.

1. True or False: If you can earn 12% on your investments and you can borrow money at an annual
compound rate of 10%, then you would prefer to pay off the loan with a single lump sum at the
end of 10 years rather than with 10 uniform annual.
Solution
Since the return on investment is higher than cost of borrow.
Higher the time period to hold the money, higher the arbitrage profit earned due to difference
between cost of borrowing and rate of return on investment.
Thus paying a lump sum at the end of 10 year is preferable as you are holding money for 10
years rather than paying uniform money where the newt holding period will be less than 10 years
as some part of money is getting paid at the end of each year making effective holding period
less than 10 years
Hence TRUE