Question

6. Robert is repaying a debt with 19 annual end-of-the-year payments of $800 each. At the end of the 4th year, he makes an extra payment of $1600. He then refinances his loan by reducing his remaining payment period by 2 years and making level payments over the remaining time. If the effective rate of interest is 8.9%, what is the amount of his new annual payment?

Answer = $

Answer 1

Using financial calulator:

Step 1: Calculate orginal principal of loan

N=19, I/Y=8.90%, PMT=-800, FV=0, CPT--->PV = $7209.79

Step 2: Calculate balance remaining after 4 years:

N=4, I/Y=8.90%, PMT=-800, PV=7209.79, CPT--->FV = $6486.80, out of which $1600 is paid instantly, Therefore, remaining balance = $4886.80, which is the principal for new debt.

Step 3: Calculate payment on new loan:

N=19-4-2=13, I/Y=8.90%, PV=4886.80, FV=0, CPT--->PMT = $649.23

Kindly give a thumbs up!