David Company borrowed $550,000 on December 31, 2014. The loan will be paid with six equal annual payments of $115,388, beginning on December 31, 2015. The rate of interest compounded annually for the loan is

Question

Quizplus · Accepted Answer

To find the rate of interest compounded annually, we need to find the present value of the loan. We have to use the annuity formula for finding the present value of the loan.
Present value of the loan = Annual payment * [1 - 1 / (1 + r)^n] / r
where
Annual payment = $115,388
n = Number of years = 6
Present value of the loan = $550,000

Substituting the values in the formula and solving for r, we get:
$550,000 = $115,388 * [1 - 1 / (1 + r)^6] / r
r = 7%

Therefore, the rate of interest compounded annually for the loan is 7%.

David Company Borrowed $550,000 on December 31, 2014