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The interest rate might be called the discount rate, opportunity cost of capital, compound rate as...

The interest rate might be called the discount rate, opportunity cost of capital, compound rate as well as other terms we will discuss later. Often a firm or individual is interested in computing the interest rate associated with a financial transaction. The interest rate is often used as a measure of the projects risk when it is set by the market.

Northern Air Lines is financing a new plane with a loan of $100,000 to be repaid in 5 annual end-of-year installments of $30,000.  What annual interest rate is the company paying?

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Answer #1
Annual rate(M)= yearly rate/12= 15.24% Annual payment= 30000.00
Year Beginning balance (A) Annual payment Interest = M*A Principal paid Ending balance
1 100000.00 30000.00 15238.24 14761.76 85238.24
2 85238.24 30000.00 12988.80 17011.20 68227.04
3 68227.04 30000.00 10396.60 19603.40 48623.64
4 48623.64 30000.00 7409.39 22590.61 26033.03
1 5 26033.03 30000.00 3966.97 26033.03 0.00
Annual rate %=15.24
Where
Interest paid = Beginning balance * Annual interest rate
Principal = Annual payment – interest paid
Ending balance = beginning balance – principal paid
Beginning balance = previous Year ending balance
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