South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid in 5 annual end-of-year installments of $2,504.56.What annual interest rate is the company paying?

Question

Quizplus · Accepted Answer

Using the formula for present value of an annuity, we can solve for the annual interest rate.

PV = PMT x [1 - (1+r)^-n] / r

Where:
PV = present value (loan amount) = $10,000
PMT = payment = $2,504.56
r = annual interest rate 
n = number of periods = 5

Plugging in the values, we get:

$10,000 = $2,504.56 x [1 - (1+r)^-5] / r

After solving for r using trial and error or a financial calculator, we get r = 8%.

Therefore, the answer is B - 8%.

South Penn Trucking Is Financing a New Truck with a Loan