Ian loaned his friend $20,000 to start a new business. He considers this loan to be an investment, and therefore requires his friend to pay him an interest rate of 6% on the loan. He also expects his friend to pay back the loan over the next four years by making annual payments at the end of each year. Ian texted and asked that you help him calculate the annual payments that he should expect to receive so that he can recover his initial investment and earn the agreed-upon 6% on his investment. Required: Calculate the annual payment.
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Given: $20,000, payed annually at an interest rate of 6%.
Change percentage into decimal in order to calculate the amount of money to be paid to Ian at every end of the year.
In changing percentage to decimal, divide the percentage by 100.
6/100 = 0.06
Next take the 6% of $20,000 by multiplying 0.06
(20,000)(0.06)
= $1,200
Add $1,200 and $20,000, in order to get the total amount.
= $1,200 + $20,000
=$21,200
The annual payment to be received is $21,200.