A small business owner visits his bank to ask for a loan. The owner states that
ID: 2796607 • Letter: A
Question
A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $2,900 per month for the next three years and then $1,900 per month for two years after that. If the bank is charging customers 9.50 percent APR, how much would it be willing to lend the business owner? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $2,900 per month for the next three years and then $1,900 per month for two years after that. If the bank is charging customers 9.50 percent APR, how much would it be willing to lend the business owner? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Explanation / Answer
PV of outstanding loan after three years can be calculated using PV function
N = 2 x 12 = 24, I/Y = 9.5%/12, FV = 0, PMT = 1,900 => Compute PV = $41,381.27
Now, the present value of loan
N = 3 x 12 = 36, I/Y = 9.5%/12, FV = 41,381.27, PMT = 2,900
=> Compute PV = $121,686.03 is the loan amount today.