A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $2,000 per month for the next three years and then $1,000 per month for the two years after that. If the bank is charging customers 8.5 percent APR, how much would it be willing to lend the business owner?
A) $80,419.29
B) $6,494.66
C) $21,780.74
D) $96,000.00

Question

Quizplus · Accepted Answer

The loan amount can be calculated using the present value of an annuity formula, which considers the monthly payments, the interest rate, and the duration of the loan. The calculation involves two parts due to the change in payment amount after three years. First, calculate the present value of $2,000 monthly payments for three years (36 months), and then calculate the present value of $1,000 monthly payments for the following two years (24 months). Finally, sum these two present values to find the total amount the bank would be willing to lend. The correct calculation results in a total of approximately $80,419.29, making option A the correct answer.

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