Question

Lowlife Company defaulted on a $270,000 loan that was due on December 31, 2021. The bank has agreed to allow Lowlife to repay the $270,000 by making a series of equal annual payments beginning on December 31, 2022. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. Calculate the required annual payment if the bank’s interest rate is 10% and four payments are to be made.
2. Calculate the required annual payment if the bank’s interest rate is 8% and five payments are to be made.
3. If the bank’s interest rate is 10%, how many annual payments of $32,278 would be required to repay the debt?
4. If three payments of $97,294 are to be made, what interest rate is the bank charging Lowlife?
  

Answer 1

1. Computation of Amount of Annual payment

Annual payment = $270,000 / PVAF @10%, for 4 year

= $270,000 / 3.1699

Annual payment = $85176

2. Computation of Amount of Annual payment

Annual payment = $240,000 / PVAF @ 8% for 5 Year

$270,000 / 3.9927= $67623

3. Computation of No. of Annual Payment Made

$270,000 = $32,278 * PVA of $1 (10%, n)

PVA of $1 (10%, n) = 8.365

As per Present Value Table , n = 19

Hence, No. of Annual payment wil be 19

4. Computation of Interest Rate

$270,000 = $97294 * PVA of $1 (i%, 3)

PVA of $1 (i%, 3) = 2.7751

As per Present Value Table , i = 4%

Hence, Interest Rate Charged will be 4%