Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

Janet takes out a loan of $10,000 at an annual interest rate of 6ext{%}, to be repaid in equal monthly installments over 5 years. By the time Janet pays off her entire loan, how much total interest will she have paid?

$6,000

$2,500

$1,600

$3,199

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Verified step by step guidance

Step 1: Understand the problem. Janet has taken out a loan of $10,000 at an annual interest rate of 6%. She will repay the loan in equal monthly installments over 5 years. The goal is to calculate the total interest paid over the life of the loan.

Step 2: Calculate the monthly interest rate. The annual interest rate is 6%, so divide it by 12 to find the monthly interest rate: $ \text{Monthly Interest Rate} = \frac{6}{100 \times 12} $.

Step 3: Determine the total number of payments. Since the loan is repaid over 5 years with monthly installments, multiply the number of years by 12: $ \text{Total Payments} = 5 \times 12 $.

Step 4: Use the formula for the monthly payment of a loan. The formula is $ M = \frac{P \cdot r \cdot (1 + r)^n}{(1 + r)^n - 1} $, where $ M $ is the monthly payment, $ P $ is the loan principal ($10,000), $ r $ is the monthly interest rate, and $ n $ is the total number of payments.

Step 5: Calculate the total amount paid over the life of the loan by multiplying the monthly payment $ M $ by the total number of payments $ n $. Subtract the original loan principal from this total to find the total interest paid: $ \text{Total Interest} = (M \times n) - P $.