A manufacturing ﬁrm takes out a $500,000 loan to expand its plant. The loan has an annual interest rate of 7 percent. What would be the total compounded interest on the loan at the end of ﬁve years,
Excluding the principal?

Question

Quizplus · Accepted Answer

The formula for compound interest is A = P(1 + r/n)^(nt) - P, where A is the final amount, P is the principal, r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the number of years.

In this case, P = $500,000, r = 7% or 0.07, n = 1 (annual compounding), and t = 5. Plugging these values into the formula, we get:

A = $500,000(1 + 0.07/1)^(1*5) - $500,000
A = $201,275

Therefore, the total compounded interest on the loan at the end of five years, excluding the principal, is $201,275 - $500,000 = -$298,725 (or a loss of $298,725). However, since the question asks for the total compounded interest only (and not the final amount), the answer is D) $201,275.

A Manufacturing ﬁRm Takes Out a $500,000 Loan to Expand