Question

You have a loan outstanding. It requires making eight annual payments of $2,000 each at the end of the next eight

years. Your bank has offered to restructure the loan so that instead of making the eight payments as originally​ agreed, you will make only one final payment in eight

years. If the interest rate on the loan is 5%​, what final payment will the bank require you to make so that it is indifferent to the two forms of​ payment?

Answer 1

Present value of annual payment =PVA 5%,8* annual payment

                    = 6.46321 * 2000

                    = 12926.42

At difference point ,present value of both options will be equal .

Present value of option 2 =PVF 5%,8* final payment

12926.42 = .67684* Final payment

Final payment = 12926.42 /.67684

                         = $ 19098.19

**Find present value annuity factor and present value factor from table at 5 % for 8 periods.