A friend of yours would like you to lend him $5,000 today to be paid back in 5 annual payments. What would be the equal annual end-of-year payment on this loan if you charge your friend 7% interest?
A) $869.45
B) $1,000.00
C) $1,219.51
D) $1,350.00

Question

Quizplus · Accepted Answer

To calculate the equal annual end-of-year payment, we need to use the formula for the Present Value of an Annuity:

PV = C x [(1 - (1 + r)^-n) / r]

Where PV is the present value of the loan ($5,000), C is the equal annual end-of-year payment, r is the interest rate (7% or 0.07), and n is the number of years (5).

5,000 = C x [(1 - (1 + 0.07)^-5) / 0.07]

5,000 = C x 3.227

C = 5,000 / 3.227

C = 1,549.16

Therefore, the equal annual end-of-year payment on this loan would be $1,549.16, which is closest to option C: $1,219.51.

A Friend of Yours Would Like You to Lend Him