Homework Answers
Loan Amount = PV = $15,000
Annual Payment = P = $3,900
r = interest rate = 20%
Let n = number of years
Annual payment can be calculated using the below formula
Annual payment = [r* PV] / [1 - (1+r)^-n]
$3,900 = [20% * $15,000] / [1 - (1+20%)^-n]
$3,900 = $3,000 / [1 - (1.20)^-n]
1 - (1.20)^-n = 0.7692307692
(1.20)^-n = 0.230769231
(1.20)^n = 4.3333333333
n = 8.04258747404
It will take 8.04 years to pay off the loan if he takes offer 2
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