Question

A bank just approved your small business loan for $25,000. The loan has an interest rate of 10.5% and will be repaid with 10 end-of-year payments. What is the required annual loan payment?

a.$2980.59 b.$4156.43 c.$3396.03 d.$3642.15 e.$4572.23

Answer 1

b.$4156.43

Step-by-step explanation:

Assuming Payment are made at the end of each year:

Following formula will be used to calculate the annual loan payment.

P = a/{[(1+r)^n]-1}/[r(1+r)^n]

whereas

P= Annual Payment

a = Loan amount

r = rate of interest

n = number of years

P = a/{[(1+r)^n]-1}/[r(1+r)^n]

P = a x
`([r(1+r)^n])/((1+r)^n]-1)`

P = $25,000 x
`([0.105(1+0.105)^10])/((1+0.105)^10]-1)`

P = $4,156.43

So the correct answer is b.$4156.43