Picard Orchards requires a R100,000 annual loan in order to pay laborers to tend and harvest its fruit crop.Picard borrows on a discount interest basis at a simple annual rate of 11 percent.If Picard must actually receive R100,000 net proceeds to finance its crop, then what must be the face value of the note?

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 required. In other words, the face value will be the amount that must be borrowed in order to receive the net proceeds.

To find the face value, we can use the formula:

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

Where time is the length of the loan in years.

In this case, we have:

Face Value = 100,000 / (1 - 0.11 x 1)
Face Value = 100,000 / 0.89
Face Value = 112,359.55

Rounding to the nearest rand, the face value of the note is R112,360, so the best choice is C.

Picard Orchards Requires a R100,000 Annual Loan in Order to Pay