Question

Lowlife Company defaulted on a $240,000 loan that was due on December 31, 2018. The bank has agreed to allow Lowlife to repay the $240,000 by making a series of equal annual payments beginning on December 31, 2019. (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 $29,919 would be required to repay the debt? 4. If three payments of $83,221 are to be made, what interest rate is the bank charging Lowlife?

Answer 1

Answer 1.

Amount outstanding = $240,000
Interest rate = 10%
Number of payments = 4

Annual payment = $240,000 / PVA of $1 (10%, 4)
Annual payment = $240,000 / 3.1699
Annual payment = $75,712

Answer 2.

Amount outstanding = $240,000
Interest rate = 8%
Number of payments = 5

Annual payment = $240,000 / PVA of $1 (8%, 5)
Annual payment = $240,000 / 3.9927
Annual payment = $60,110

Answer 3.

Amount outstanding = $240,000
Interest rate = 10%
Annual payment = $29,919

Number of payments = n

$240,000 = $29,919 * PVA of $1 (10%, n)
PVA of $1 (10%, n) = 8.0217

Using table values, n = 17

Number of annual payments = 17

Answer 4.

Amount outstanding = $240,000
Number of payments = 3
Annual payment = $83,221

Interest rate = i%

$240,000 = $83,221 * PVA of $1 (i%, 3)
PVA of $1 (i%, 3) = 2.8839

Using table values, i = 2.0%

Interest rate charged is 2.00%