Question

A company must repay the bank a single payment of $25,000 cash in 4 years for a loan it entered into. The loan is at 7% interest compounded annually. The present value of 1 (single sum) at 7% for 4 years is .7629. The present value of an annuity (series of payments) at 7% for 4 years is 3.3872. The present value of the loan (rounded) is: __________

a. $19,073.
b. $25,000.
c. $29,101.
d. $7,381.

Answer 1

The correct option is a. $19,073.

Step-by-step explanation:

Since the company must repay the bank a single payment of $25,000, the present value can be calculated as follows:

PV = FV / present value of 1 (single sum) at 7% for 4 years ..................... (1)

Where;

PV = Present value of the loan = ?

FV = Future value of the loan = $25,000

Present value of 1 (single sum) at 7% for 4 years = 0.7629

Substituting the values into equation (1), we have:

PV = $25,000 / 0.7629

PV = $19,073

Therefore, present value of the loan (rounded) is $19,073. Therefore, the correct option is a. $19,073.