Company XYZ purchased some machinery and gave a five-year note with a maturity value of $20,000. The discount rate is 8% annually and the interest is discounted monthly. How much did the company borrow?
A) $13,612
B) $12,000
C) $19,346
D) $13,424

Question

Quizplus · Accepted Answer

The company borrowed $13,424. This is calculated using the formula for the present value of a single sum, taking into account that the interest is compounded monthly. The formula is: $PV = FV / (1 + r/n)^{nt}$, where PV is the present value (amount borrowed), FV is the future value ($20,000), r is the annual discount rate (0.08), n is the number of compounding periods per year (12 for monthly), and t is the number of years (5). Plugging in the numbers: $PV = 20000 / (1 + 0.08/12)^{12*5}$, which calculates to approximately $13,424.

Company XYZ Purchased Some Machinery and Gave a Five-Year Note