David Company borrowed $550,000 on December 31, 2014. The loan will be paid with six equal annual payments of $115,388, beginning on December 31, 2015. The rate of interest compounded annually for the loan is most nearly equal to
A) 9%.
B) 8%.
C) 7%.
D) 6%.

Question

Quizplus · Accepted Answer

The loan is an annuity problem where the present value of the annuity (loan amount) is $550,000, the annual payment is $115,388, and the number of periods is 6. Using the formula for the present value of an annuity, the interest rate that satisfies these conditions is approximately 7%.

David Company Borrowed $550,000 on December 31, 2014