Question

Assume a farmer takes out a five year loan for $50,000. The annual interest rate is 4% and the farmer will make equal annual principal payments for years one through five. Approximately how much interest will be paid over the life of the loan? Round all numbers to the nearest whole dollar.

A. 6160

B. 56000

C. 56160

D.6000

Answer 1

You need to use a Financial calculator to solve this problem. You can download it.

You need to find the annual fixed payment that the farmer paid.

N = 5 (The Loan is for 5 Years)

PV = -50,000 (The present value of the loan is $50,000)

FV = 0 (The Loan will be repaid in full after 5 years)

I/Y = 4% (The annual interest rate is 4%)

CPT + PMT = 11,231.35

So the farmer used to make a payment of $11,231.35 each year, So he made the payments for 5 years.

Total Payment = Annual Payment * Number of years paid

= 11,231.35 * 5

= 56,156.77

The loan amount was 50,000 and the farmer repaid 56,156.77, so the interest he paid is

= Repaid Amount - Loan Amount

= 56,156.77 - 50,000

= 6,156.77

So the correct option is "A"