Owen expects to receive $20,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 7.5%, how much money can he borrow from the bank on the basis of this information?

Question

Quizplus · Accepted Answer

To calculate the amount Owen can borrow from the bank, we need to find the present value of the $20,000 he will receive in the future. Using the formula for present value of a future amount with compound interest:

Present Value = Future Value / (1 + r)^n

where r is the interest rate and n is the number of years,

Present Value = $20,000 / (1 + 0.075)^1 = $18,605.04

Therefore, Owen can borrow up to the present value of $18,605.04 from the bank. The closest answer choice is B, $18,605.

Owen Expects to Receive $20,000 at the End of Next