In order to borrow $175,000 for an 8% loan on discount basis, the firm will actually have to borrow:

Question

Quizplus · Accepted Answer

To find out how much the firm will actually have to borrow, we need to calculate the discount.

Discount = loan amount x discount rate x time

Here, the loan amount is $175,000, the discount rate is 8%, and we don't know the time period of the loan.

However, we can estimate the time period to be one year since discounting is typically done on an annual basis.

Discount = $175,000 x 0.08 x 1 = $14,000

So the firm will actually receive:

Loan amount - Discount = $175,000 - $14,000 = $161,000

However, we need to add the interest on the loan for one year.

Interest = loan amount x interest rate x time = $175,000 x 0.08 x 1 = $14,000

So the firm will have to repay:

Loan amount + Interest = $175,000 + $14,000 = $189,000

Therefore, the best choice is option D.

In Order to Borrow $175,000 for an 8% Loan on Discount