Question

Quantitative Problem: You need $15,000 to purchase a used car. Your wealthy uncle is willing to lend you the money as an amortized loan. He would like you to make annual payments for 6 years, with the first payment to be made one year from today. He requires a 5% annual return.

a) What will be your annual loan payments? Round your answer to the nearest cent. Do not round intermediate calculations.

b) How much of your first payment will be applied to interest and to principal repayment? Round your answer to the nearest cent. Do not round intermediate calculations. Interest: $

c) Principal repayment: $

Answer 1

Information provided:

Present value= $15,000

Time= 6 years

Interest rate= 5%

a.The amount of annual payments is calculated by entering the below in a financial calculator:

PV= -15,000

N= 6

I/Y= 5

Press the CPT key and I/Y to compute the amount of annual payment.

The value obtained is 2,955.26.

Therefore, the annual payment is $2,955.26.

b.Interest payment= 0.05*$15,000

                              = $750

Principal repayment= $2,955.26 - $750

  = $2,205.26.

In case of any query, kindly comment on the solution.