On January 1,2014,ER signed a $120,000,10%,three-year,note payable.The proceeds are to be used to purchase a computer and related software for the company.The lending institution advanced proceeds of $115,800 and took a mortgage on the computer.The note is payable in three equal annual instalments starting on December 31,2014.The effective interest rate to use for this debt is (rounded to the nearest percent; do not interpolate):

Question

Quizplus · Accepted Answer

To calculate the effective interest rate, we need to first calculate the present value of the note payable. The present value of the note is $115,800 (the amount of proceeds received) since this is the amount that could be invested today to generate the future payments required by the note.

Next, we need to find the interest rate that equates the present value of the note payable with the principal amount of $120,000. This can be done using a financial calculator or spreadsheet program such as Excel.

Using Excel's RATE function, the effective interest rate is calculated as follows:
RATE(3, -120000, 115800) = 0.12 or 12%

Therefore, the best choice is C) 12%.

On January 1,2014,ER Signed a $120,000,10%,three-Year,note Payable