Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires five equal annual end-of-the-year payments. If the loan provides the bank with a 12 percent return, what will be your annual payments?

Question

Quizplus · Accepted Answer

Using the present value of an annuity formula:

PV of loan = A * [1 - (1+r)^(-n)] / r

Where A = annual payment, r = annual interest rate, n = number of years

Plugging in the values:

$20,000 = A * [1 - (1+0.12)^(-5)] / 0.12

$20,000 * 0.12 = A * [1 - (1.12)^(-5)]

$2,400 = A * 0.576

A = $5,547.85 (rounded to the nearest cent)

Therefore, the annual payments will be $5,547.85. Choice A is the correct answer.

Columbia Bank & Trust Has Just Given You a $20,000