Question

1. A construction company plans to accelerate the payments on an equipment loan as production increases. The initial payment is $10,000 per year and the plan is to increase the payment, beginning in year 2, by an additional $1,000 each year through year 10. Determine the equivalent annual payment if the load interest rate is 12%. (20 points)

Answer 1

The initial payment is $10,000 per year.

A₁ = $10,000

Annual increase in payment (G) = $1,000

Time period (n) = 10 years

Interest rate (i) = 12%

Calculate the equivalent annual payment -

Equivalent annual payment = Initial payment + Annual increase in payment(A/G, i, n)

Equivalent annual payment = A₁ + G(A/G, i, n)

Equivalent annual payment = $10,000 + $1,000(A/G, 12%, 10)

Equivalent annual payment = $10,000 + [$1,000 * 3.5847]

Equivalent annual payment = $10,000 + $3,584.7

Equivalent annual payment = $13,584.7

Thus,

The equivalent annual payment is $13,584.7