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)$21 500
C)$15 000
D)$18 605

Question

Quizplus · Accepted Answer

To determine how much money Owen can borrow from the bank, we need to calculate the present value of the $20 000 he expects to receive in one year. We can use the present value formula:

Present Value = Future Value / (1 + r)^n

Where r is the interest rate and n is the number of years.

In this case, r = 7.5% or 0.075, n = 1, and Future Value (FV) = $20 000. Substituting these values, we get:

Present Value = $20 000 / (1 + 0.075)^1

Present Value = $18 605.66

This means that Owen can borrow up to $18 605.66 from the bank, since he will be able to repay the loan with the $20 000 he expects to receive in one year.

The closest answer choice to this is D ($18 605), which is the correct answer. None of the other answer choices are close to the correct value, so they can be ruled out.

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