Discussion
If a debt is cleared by paying in two instalments, ₹.17,640 in each instalment, wherein the interest is allowed at the rate of 5% p.a. compounded annually, then the amount borrowed is:
Answer: C
The amount borrowed is Rs. 32,800. The principal equals the present value of the two instalments at 5 per cent compound interest. \[P = \frac{17640}{1.05} + \frac{17640}{(1.05)^2}\] \[P = 16800 + 16000 = 32800\] The first instalment, paid after one year, is discounted once and the second, paid after two years, twice. The option Rs. 35,280 is the plain sum of the two instalments, which ignores interest.
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