Question

A small business administration offers business loans at 5.2% interest compounded monthly for 8 years. If the owner can afford monthly payments of $600, what is the maximum amount the owner can borrow?

Answer 1

$47,039

Explanation:

The time-value-of-money (TVM) functions of a calculator or spreadsheet can be used to find the present value of a series of $600 payments, discounted at 5.2% compounded monthly. (See the attachment for an example.) The present value is found to be about $47,039.

The owner can afford to borrow up to $47,039.

__

This can be figured "by hand" using the amortization formula.

A = P(r/12)/(1 -(1 +r/12)^(-12·t))

A is the payment on a loan of principal P at annual rate r for t years, compounded monthly.

Solving for P, we have ...

P = 12A(1 -(1 +r/12)^(-12t))/r = 12·600(1 -(1 +0.052/12)^-96)/0.052

P ≈ 47039.0653

The owner can borrow up to $47,039.