Viking Farms harvests crops in roughly 90-day cycles based on a 360-day year. The firm receives payment from its harvests sometime after shipment. Due in part to the firm's rapid growth, it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest. If the firm requires $60,000 in proceeds from each note, what must be the face value of each note?
A) $61,856
B) $67,531
C) $60,000
D) $68,182
E) $67,423

Question

Quizplus · Accepted Answer

The face value of the note is the amount of money that the borrower receives from the lender. The discount interest is the amount of interest that the borrower pays to the lender for the use of the money. The proceeds of the note are the amount of money that the borrower receives from the lender after the discount interest has been deducted.In this case, the firm requires $60,000 in proceeds from each note. The discount interest rate is 12%. The discount interest is calculated as follows:Discount interest = Face value of note * Discount interest rate * TimeDiscount interest = Face value of note * 0.12 * 90/360Discount interest = Face value of note * 0.03The proceeds of the note are calculated as follows:Proceeds of note = Face value of note - Discount interestProceeds of note = Face value of note - (Face value of note * 0.03)Proceeds of note = Face value of note * (1 - 0.03)Proceeds of note = Face value of note * 0.97We know that the proceeds of the note are $60,000. Therefore, we can solve for the face value of the note as follows:Face value of note * 0.97 = $60,000Face value of note = $60,000 / 0.97Face value of note = $61,856.70Therefore, the face value of each note must be $61,856.

Viking Farms Harvests Crops in Roughly 90-Day Cycles Based on a 360-Day