Question

Lang Warehouses borrowed $287,610 from a bank and signed a note requiring 15 annual payments of $27,709 beginning one year from the date of the agreement. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: Determine the interest rate implicit in this agreement

Answer 1

The interest rate implicit in this agreement is 5%

Step-by-step explanation:

A fix periodic payment made for a specific of time is known as annuity.

The 15 annual loan payment of $27,709 is an annuity payment and we will use the following formula to calculate the interest rate.

PV of annuity = P x annuity factor

Where

P = annual payments = $27,709

Placing values in the formula

$287,610 = $27,709 x annuity factor

Annuity factor = $287,610 / $27,709

Annuity factor = 10.37966

The annuity factor of 10.37966 for 15 years is for 5% interest rate.