Question

Largent Supplies Corp. has borrowed to invest in a project. The loan calls for a payment of $17,384 every month for three years. The lender quoted Largent a rate of 8.40 percent with monthly compounding. At what rate would you discount the payments to find the amount borrowed by Largent?

Answer 1

The rate used to discount the monthly payments of $17,384 for three years to find the amount borrowed by Largent Supplies Corp. is the same rate quoted by the lender, which is an 8.40% rate with monthly compounding.

Step-by-step explanation:

To determine the amount borrowed by Largent Supplies Corp., we need to discount the monthly payments back to the present value.

Given that the company has a loan requiring monthly payments of $17,384 for three years at a monthly compounded interest rate of 8.40%, the rate used to discount these payments is the same as the interest rate on the loan, namely 8.40% monthly compounded rate.

This discount rate is necessary to calculate the present value of an annuity, which represents the total amount borrowed by Largent. It's important to understand that even though the rate is quoted as an annual rate, because compounding is monthly, this is the effective monthly rate used for discounting the payments.

To carry out these calculations, the present value formula for an annuity can be applied, which factors in the periodic payment amount, the discount rate, and the number of periods (in this case, monthly over three years).