Marion makes annual end-of-year payments of $6,260.96 on a five year loan with an 8 percent interest rate. The original principal amount was _________.

Question

Marion makes annual end-of-year payments of $6,260.96 on a five year loan with an 8 percent interest rate. The original principal amount was  _________.

Quizplus · Accepted Answer

We can use the formula for the present value of an annuity to solve for the original principal amount:
Present Value = Payment * [(1 - (1 + interest rate)^-number of payments)/interest rate]
Plugging in the given values, we get:
Present Value = 6,260.96 * [(1 - (1 + 0.08)^-5)/0.08]
Present Value ≈ $24,999.62
Therefore, the closest choice to our calculated present value is B) $25,000.

Marion Makes Annual End-Of-Year Payments of $6,260