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Exercise 6-9
LEW Company purchased a machine at a price of $107,000 by signing a note payable, which requires a single payment of $172,325 in 5 years. (Use the table below.)
Assuming annual compounding of interest, what rate of interest is being paid on the loan?
| Rate of interest |  |
% |
Expert Answer
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
Hence,
$ 172,325= $ 107,000 * ( 1+ r/100 ) ^5
or ($ 172,325 / $ 107,000 ) ^ ( 1/5) = (1+ r/100)
or 1+ r/100 = 1.10
or r= (1.10- 1) *100
= 10%
Hence the correct answer is 10 .00 %
