Question

# Geoffrey decides not to buy the car mentioned earlier. Instead, he is now considering a food...

Geoffrey decides not to buy the car mentioned earlier. Instead, he is now considering a food delivery service "You, bars, meats" that his friend Gillian has recently started. Gillian has agreed that for a single payment of \$52,000 today to help her launch her business, she will provide all the delivery services that Geoffrey needs for his business for the next 5 years. Geoffrey is considering borrowing the full amount from his business account.

Suppose that Geoffrey makes level quarterly repayments over the coming 5 years, the first payment being exactly 3 months from today. Again, the interest rate on Geoffrey's account is 4.5% p.a. effective.

How much money does Geoffrey owe on this loan after 1 year?

Total Loan amount = \$ 52,000

Years for which loan taken = 5 year

Amount will be paid in quarterly installment so 4 installments in a year and 20 installments in 5 years

The mathematical formula to calculate EMI is: EMI = P × r × (1 + r)n/((1 + r)n - 1) where P= Loan amount, r= interest rate, n=tenure in number of months.

Rate of interest = 4.5% pa so Rate for Quaterly = 4.5%/4 = 1.125%

So EMI = \$ 52000 * 1.125% * ( 1 + 1.125% )^20)/ (1 + 1.125% )^20 -1 = \$ 2918

Interest Schedule for 1 st year

 Installment Outstanding Amount at the start of Quarter Interest EMI Outstanding amount at the end of Quarter 1 52000 585 -2918 49667 2 49667 559 -2918 47308 3 47308 532 -2918 44922 4 44922 505 -2918 42509

So after one year Geoffrey will owe \$42509

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