Question

#10) Indigo River Media just bought a new bowling alley. To pay for the bowling alley, the company took out a loan that requires Indigo River Media to pay the bank a special payment of 6,470 dollars in 2 month(s) and also pay the bank regular payments.   The first regular payment is expected to be 3,610 dollars in 1 month and all subsequent regular payments are expected to increase by 0.36 percent per month forever. The interest rate on the loan is 1.57 percent per month. What was the price of the bowling alley?

Answer 1

Present value of monthly payment = $3,610 / (1.57% - 0.36%)

= $3,610 / 1.21%

= $298,347..11

Present value of monthly payment is $298,347..11

Now, Present value of special payment = $6,470 / (1 + 1.57%) ^ 2

= $6,470 / 1.03164

= $6,271.53

Present value of special payment is $6,271.53

Price of the new bowling alley = Present value of monthly payment + Present value of special payment

= $298,347..11 + $6,271.53

= $304,618.64

Price of the new bowling alley is $304,618.64.