Answer:
The answer is 8 years.
Explanation:
In Offer 2, we apply the present value formular for annuity to calculate the number of repayment, thus number of year payback because repayment is made once a year.
We have the formular to calculate present value of annuity as followed:
PV = (C/i) x [1-(1+i)^(-n)].
apply to the question, we have:
PV = the owed principal amount = $15,000;
i = annual interest rate compounded once a year = 20%;
C = number of equal annual repayment = $3,900;
n: number of repayment made thus number of year payback.
As we need to find n, we have:
15,000 = (3,900/20%) x [ 1- 1.20^(-n)] <=> 1-1.2^(-n) = 0.769 <=> 1.2(^-n) = 0.231 <=> n = -(the base 1.2 logarithm of 0.231) = 8
