Question

Milton took out a loan for S2400 at 7% interest compounded annually the makes yearly payments of $140, will he ever pay off the loan?

A. Yes, because $140 is less than the amount of interest he is
charged per year.)
B. No, because $140 is greater than the amount of interest he is
charged per year.
C. Yes, because $140 is greater than the amount of interest he is
charged per year.
D. No, because $ 140 is less than the amount of interest he is
charged per year.​

Answer 1

We will choose option D.

Explanation:

Milton took out a loan for $2400 at 7% interest compounded annually.

So, after one year his loan will grow up to
`2400(1 + (7)/(100) )^(1) = 2568` dollars.

Therefore, the interest added to the principal is $(2568 - 2400) = $168

But Milton makes yearly payment of $140 which is less than the interest i.e. $168 which is added to his loan in the first year.

Therefore, he can not ever pay off the loan.

So, we will choose option D. (Answer)