Question

Brown Company borrows $40,000 on January 1, year 1, with a 5% annual interest rate. The annual payment includes both interest and principal. What is the annual payment?

a. $11,280
b. $10,800
c. $10,000
d. $12,000

Answer 1

To calculate the annual payment, divide the loan amount by the present value factor. The annual payment for this loan is $11,280.

Step-by-step explanation:

To calculate the annual payment, we need to use the formula for calculating the present value of an annuity, which is:

Annual payment = Loan amount / Present value factor

Present value factor can be calculated using the formula:

PV factor = (1 - (1 + interest rate)^(-n)) / interest rate

Where:
- Loan amount is $40,000
- Interest rate is 5%
- n is the number of years, which in this case is 1

Plugging in these values, we can calculate the annual payment:

1. 
   
3. 
   

Therefore, the correct answer is a. $11,280.