Picard Orchards requires a $100,000 annual loan in order to pay laborers to tend and harvest its fruit crop. Picard borrows on a discount interest basis at a nominal annual rate of 11 percent. If Picard must actually receive $100,000 net proceeds to finance its crop, then what must be the face value of the note?
A) $111,000
B) $100,000
C) $112,360
D) $ 89,000
E) $108,840

Question

Quizplus · Accepted Answer

Since Picard borrows on a discount interest basis, the face value of the note will be greater than the net proceeds received. Using the formula:

Face Value = Net Proceeds / (1 - Discount Rate x Time)

We know that the net proceeds are $100,000 and the discount rate is 0.11. We need to find the time period, which is not given in the question. Let's assume it is one year.

Face Value = $100,000 / (1 - 0.11 x 1)
Face Value = $112,360

Therefore, the face value of the note must be $112,360 in order for Picard to receive $100,000 net proceeds after discounting the interest. So, the best choice is C.

Picard Orchards Requires a $100,000 Annual Loan in Order to Pay