QUESTION 20 You need to borrow $5,000 for two years. Easy Finance Co. will loan
ID: 2771533 • Letter: Q
Question
QUESTION 20
You need to borrow $5,000 for two years. Easy Finance Co. will loan you the money and you will pay back the finance company $6,250 in two years and the interest on the loan is compounded annually. You do not want to pay more than 10% annual interest. Would you want to take out this loan? Yes/No because ____.
Yes; the loan interest is exactly 10%
Yes; the loan interest is 8.46%
No; the loan interest is 12.4%
No; the loan interest is 11.8%
a.Yes; the loan interest is exactly 10%
b.Yes; the loan interest is 8.46%
c.No; the loan interest is 12.4%
d.No; the loan interest is 11.8%
Explanation / Answer
If we apply the given parameter values to the compounding formula, we get:
6250= 5000(1 + r/100)2 .....................
1.25= (1 + r/100)2
Using Iteration function in MS Excel spreadsheet to the above equation, we obtain;
r= 11.80 i.e. rate of interest compounded annually= 11.80% per annum
This means that if I have to borrow $5000 from Easy Finance Co. for two years with payback amount of $6250 after two years with interest compounded annually, then the rate of interest works out to 11.80% per annum which is more than 10% per annum of interest rate whilch i am willing to pay. Hence, I would not like to take this loan offer from Easy Finance Co.
Thus, the ANSWER is d.) No; the loan interest is 11.8%
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