If a company borrows $20 million and repays this loan in ten annual installments of $2.2 million, the effective cost of this loan is closest to:

Question

Quizplus · Accepted Answer

The effective cost of the loan is the internal rate of return (IRR) of the cash flows. The IRR is the discount rate that makes the net present value of the cash flows equal to zero. In this case, the cash flows are the $20 million loan and the ten annual repayments of $2.2 million. The IRR is approximately 1.77%.

If a Company Borrows $20 Million and Repays This Loan