Question

To purchase a new equipment, you borrow $52,550. An equipment dealer offers a five-year loan at an interest rate of 5% compounded annually. If you make only payment at the end of the load period, repaying the principal and interest.

a) What is the number of time periods (N) you should use in solving this problem?

b) What rate of interest (i), per period of time, should be used in solving this problem?

c) Is the present single amount of money (P) known? (Yes or No)

d) Which time value factor should be used to solve this problem? Choices are (F/P,i%,N),(P/F,i%,N),(F/A,i%,N),(A/F,i%,N),(P/A,i%,N),(A/P,i%,N)

e) What is the total amount that must be paid back? (round to one decimal place, use 1000 Separator)

f) How much of the total amount repaid represents interest? (round to one decimal place, use 1000 Separator)

Answer 1

Solution:

Amount Borrowed = $52,550

Interest rate = 5% compounded annually

Period = 5 years

a) If payment will be made at the end of loan period paying principal and interest then number of times period to used (N) = 5

b) rate of interest (i) per period of time = 5%

c) Present single amount money will be amount borrowed (P) = $52,550

d) As this is a single repayment of loan and future value is to be calculated, therefore we will use time value factor = (F/P,i%,N)

e) Amount to be paid back = $52,550 * F/P factor at 5% for 5 period

= $52,550 * 1.276 = $67,053.8

f) Interest amount paid = $67,053.8 - $52,550 = $14,503.8