Owen expects to receive $20,000 at the end of next year from a trust fund.If a bank loans money at an interest rate of 7.5%,how much money can he borrow from the bank on the basis of this information?
A)$11,428
B)$15,000
C)$18,605
D)$21,500
E)$20,000

Question

Quizplus · Accepted Answer

To find out how much money Owen can borrow from the bank, we need to discount the future amount he is expected to receive using the given interest rate.

Using the formula for present value of a future amount:
Present Value = Future Value / (1 + Interest Rate)^Time

Where:
Future Value = $20,000
Interest Rate = 7.5% or 0.075 (in decimal form)
Time = 1 year

Plugging in the numbers:
Present Value = $20,000 / (1 + 0.075)^1
Present Value = $18,605.04

This means that Owen can borrow up to $18,605.04 from the bank if he is able to pay back the loan with 7.5% interest at the end of the year. Therefore, the best choice is C.

Owen Expects to Receive $20,000 at the End of Next