Question

RKI Instruments borrowed $4,100,000 from a private equity firm for expansion of its facility for manufacturing carbon monoxide monitors. The company repaid the loan after 1 year with a single payment of $5,325,000. What was the interest rate on the loan

Answer 1

Answer:

29.88%(30% when rounded to the nearest whole percentage)

Explanation:

The amount borrowed was the present value of the loan while the amount repaid was the future value of the loan, hence, considering the relationship between the present value and the future value, we can determine the interest rate on the loan as shown thus:

FV=PV*(1+r)^n

FV=future value=the repayment=$5,325,000

PV=present value=loan amount= $4,100,000

r=rate of interest=the unknown

n=the duration of the loan=1 year

$5,325,000= $4,100,000*(1+r)^1

$5,325,000/$4,100,000=1+r

r=($5,325,000/$4,100,000)-1

r=1.298780488 -1

r=29.88%