A small business owner visits his bank to ask for a loan. The owner states that she can repay a loan at $1,500 per month for the next 3 years and then $500 per month for three years after that. If the bank is charging customers 10 percent APR, how much would it be willing to lend the business owner?
A) $32,019.95
B) $57,980.57
C) $61,982.47
D) $192,119.70

Question

Quizplus · Accepted Answer

The loan amount is the present value of the future cash flows. The first 3 years have monthly payments of $1,500, and the next 3 years have monthly payments of $500. Using the formula for the present value of an annuity and the given APR of 10% (or 0.8333% per month), the present value of these cash flows is approximately $57,980.57.

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