426,370 views
8 votes
8 votes
You lend a friend ​$​, which your friend will repay in equal annual​ end-of-year payments of ​$​, with the first payment to be received 1 year from now. What rate of return does your loan​ receive?

User Abdur Rafay Saleem
by
2.4k points

1 Answer

15 votes
15 votes

Answer: 18%

Step-by-step explanation:

The payments that your friend will make are an annuity as they are constant. This means that the loan amount of $15,000 is the present value of the annuity.

To find the rate of return, use the factor tables.

Present value of annuity = Annuity * Present value interest factor of annuity, 14 years, ?%

15,000 = 3,000 * Present value interest factor of annuity, 14 years, ?%

Present value interest factor of annuity, 14 years, ?% = 15,000 / 3,000

Present value interest factor of annuity, 14 years, ?% = 5.0

Go to the present value of annuity factor table and find out what interest rate intersects with 14 periods such that the factor is 5.0.

That rate is 18%.

Rate of return is therefore 18%.

You lend a friend ​$​, which your friend will repay in equal annual​ end-of-year payments-example-1
User Oliora
by
2.3k points