A small business owner visits his bank to ask for a loan. The owner states that she can repay a loan at $1,250 per month for the next 3 years and then $500 per month for two years after that. If the bank is charging customers 12% APR, how much would it be willing to lend the business owner?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the loan payments is $45,058.15. The present value of the loan payments is calculated by multiplying the monthly payment by the present value factor for the number of months of the loan. The present value factor for 12% APR for 3 years is 27.3554, and the present value factor for 12% APR for 2 years is 18.0611. The present value of the loan payments is $1,250 x 27.3554 + $500 x 18.0611 = $45,058.15.

A Small Business Owner Visits His Bank to Ask for a Loan