Maxwell Gardens requires a $100,000 annual loan in order to pay laborers to tend and harvest its organic vegetable crop.Maxwell borrows on a discount interest basis at a nominal annual rate of 11 percent.If Maxwell 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 Maxwell Gardens borrows on a discount interest basis, the face value of the note must be higher than the net proceeds that they receive. 
Using the formula:
Face Value = Net Proceeds / (1 - Discount Rate x Time)
where Time is the fraction of a year, we can solve for the face value:
Face Value = $100,000 / (1 - 0.11 x 1)
Face Value = $100,000 / 0.89
Face Value = $112,360
Therefore, the best choice is C.

Maxwell Gardens Requires a $100,000 Annual Loan in Order to Pay