QUESTION 6
Maui Candy Company borrowed $400,000 to purchase a new building. Maui Candy signed a promissory note to repay the loan in 10 equal installments due
at the end of each year, starting one year from now. If the loan has a 5% interest rate, what is the amount of each payment?
O A. $31.802
O B. $245,564
C. $51,802
O D. $42.000

C. $51,802

Explanation:

The amount borrowed is $400,000. Annual payments will represent the value of a 10-year annuity, with $400,000 are the future value at 5 percent interest. The applicable formula is

P   = PV ×     r            

                1 − (1+r)−n

P is the present value

r is the interest rate at 5%  or 0.05

n is the time which 10 years

P = $400,000 x    0.05  

 1-(1+0.05)-10

P = $400,000 x   0.05    

    1- 0.6139

P =$400,000 x (0.05/0.3861)

P= $400,000 x 0.129504

P=51, 801. 6

the correct answer is $42,000 and this is how you get that answer.

first see that we have a borrowed amount of $400,000 and the total interest expense is $400,000 x 5% = 20,000

this means we have a total obligation of $420,000 to pay over a period of 10 installments.

now, divide the $420,000/10 and the answer will be $42,000.

so, Maui Candy company will have to pay $42,000 for 10 installments.  

Explanation:

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