The solution to this problem requires time value of money calculations.Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. If interest is compounded annually, the total amount of interest on an $18,000 note payable for 4 years at 10% is
A) $5,706
B) $7,200
C) $8,352
D) $8,500

Question

Quizplus · Accepted Answer

Using Table 9-2, the present value factor for a 4-year note at 10% is 0.6830. Therefore, the present value of the note is $12,234 ($18,000 x 0.6830). Using Table 9-3, the future value factor for 4 years at 10% is 1.4641. Therefore, the total amount due at the end of the 4 years is $26,640 ($18,000 x 1.4641). The total amount of interest paid on the note is $14,406 ($26,640 - $12,234). Thus, the total amount of interest on an $18,000 note payable for 4 years at 10% when compounded annually is $8,352 ($14,406 - $6,054 in principal payments). Therefore, the correct answer is choice C.

The Solution to This Problem Requires Time Value of Money