Question

Henry Fowler borrowed $91,380 on March 1, 2015. This amount plus accrued interest at 6% compounded semiannually is to be repaid March 1, 2025. To retire this debt, Henry plans to contribute to a debt retirement fund five equal amounts starting on March 1, 2020, and for the next 4 years. The fund is expected to earn 5% per annum. Click here to view factor tables How much must be contributed each year by Henry Fowler to provide a fund sufficient to retire the debt on March 1, 2025?

Answer 1

Solution: First of all we need to compute the Loan (i.e.amount+ accrued intt.) to be paid on march 1,2025 as follows:

Loan Value at march1,2025 = $91,380(1 + 0.03)²⁰ = $165,042.44

Since we have to pay above amount as loan payment thus,we have to accumulate such amount through the annual contribution so that we would able to pay the loan.

Thus, loan value = annual contribution [(1+0.05)⁵ - 1]/ 0.05

Annual contribution = Loan value * 0.05 / [(1.05)⁵-1]

= $165,042.44 * 0.05 / [(1.05)⁵-1]

= $29,868.52