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 three years and then $500 per month for two years after that. If the bank is charging customers 12 percent APR, how much would it be willing to lend the business owner?
A) $45,058.15
B) $45,911.64
C) $46,055.21
D) $46,813.94

Question

Quizplus · Accepted Answer

The present value of the loan payments can be calculated using the formula for the present value of an annuity. The first three years have monthly payments of $1,250, and the next two years have monthly payments of $500. The bank's APR of 12% translates to a monthly interest rate of 1%. Calculating the present value of these cash flows gives approximately $45,058.15.

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