Your company borrows $55,000 today to funds its growth initiatives. It must repay the bank in 4 annual payments of $17,100 at the end of each year. What annual interest rate is your firm paying?

Question

Quizplus · Accepted Answer

The annual payment of $17,100 is an annuity, which can be used to calculate the interest rate using the following formula:

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

Where:
PV = present value of the loan = $55,000
PMT = periodic payment = $17,100
r = annual interest rate
n = number of payments = 4

Plugging in the numbers, we get:

$55,000 = $17,100 x (1 - 1/(1+r)^4) / r

Solving for r using trial and error or Excel's Goal Seek function, we get r = 9.33%.

Therefore, the correct answer is choice C, 9.33%.

Your Company Borrows $55,000 Today to Funds Its Growth Initiatives