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A small business owner visits his bank to ask for a loan. The owner states that she can repay a loan at $2,500 per month for the next two years and then $3,000 per month for another two years after that. If the bank is charging customers 6.5 percent APR, how much would it be willing to lend the business owner?

1 Answer

6 votes

Answer:

Present value = $115,278.17

Step-by-step explanation:

Given data:

Monthly repay amount for 2 year = $2500

Monthly repay amount for another 2 year = $3500

APR =6%

monthly interest rate = 6.50/12 = 0.54167%

Present value is calculated as

Present value
= (monthly payment)/((1 + monthly rate)^n)

Present value
= (2500)/((1 + 0.54167\%)^1) +(2500)/((1 + 0.54167\%)^2) +........ + (2500)/((1 + 0.54167\%)^(24)) +  (3000)/((1 + 0.54167\%)^(25)) + ...... + (3000)/((1 + 0.54167\%)^(48))

Present value
= 2500* ((1-((1)/(1.0054167))^(24)))/(0.0054167) + 3000* ((1-((1)/(1.0054167))^(24)))/(0.0054167)

Present value = $115,278.17

User Arvind Chourasiya
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