Question

In Murabaha car financing contract, total cost price for the bank is R.O.100,000.The bank sells it to the customer 5% profit per annum on a 5 year terms.Down Payment is R.O 20000. Assume for simplicity, it is paid back on yearly basis.Calculate the annual installment?

Answer 1

The formula to calculate the installment/EMI is

E = P*r* (1+r)^n/([(1+r)^n]-1)

where,

E = annual EMI/annual installment

P = principal (after deduction down payment since no interest is to be charged on down payment)

n = loan tenure (5 years)

r = rate of profit per annum

Therefore,

E = 80000*5/100*(1.05)^5 / ([1.05]^5-1)

= 80000*5/100*1.28 / 1.28-1 = 5120 / 0.28 = 18286

Monthly installment would be 1520 (approx), nominal difference in rupees might be due to rounding off of 1.05^5.