Your company borrows $275,000 today to fund its growth initiatives. It must repay the bank in five annual payments of $76,300 at the end of each year. What annual interest rate is your firm paying?
A) 10.85 percent
B) 12.01 percent
C) 17.75 percent
D) 18.02 percent

Question

Quizplus · Accepted Answer

The annual interest rate can be found using the formula for the present value of an annuity. Solving for the interest rate that equates the present value of the annuity payments ($76,300 for 5 years) to the loan amount ($275,000) gives approximately 12.01 percent.

Your Company Borrows $275,000 Today to Fund Its Growth Initiatives