Question

For each of the following loan options (a & b) compute the following values:

? annual loan payment

? proportion of principle and interest in the first annual payment

? total interest paid over the entire time line of the loan

? total principal paid over the entire time line of the loan

a. You have decided to purchase a capital asset using an 850,000 at a rate of 8% for 25 years.

b. You have decided to purchase a capital asset for 850,000 at a rate of 7% for 15 years.

c. Which option would you take and why? Explain.

Answer 1

In the first case Principal amount = 850,000

Time = 25 Years

Rate of Interest = 8%

Simple Interest that needs to be paid after the term of 25 Years = (850,000*8*25)/100

= 1700000

This is the total interest paid over the entire time line of the loan

The total principal paid or Amount paid = (1700000+850000)

= 2550000

Annual loan payment = (850000*8*1)/100

= 68000

In the first case Principal amount = 850,000

Time = 15 Years

Rate of Interets = 7%

Simple Interest that needs to be paid after the term of 15 Years = (850,000*7*15)/100

= 892500

This is the total interest paid over the entire time line of the loan

The total principal paid or Amount paid = (892500+850000)

= 1742500

Annual loan payment = (850000*7*1)/100

= 59500.

I would Take option B because in this case the rate of interest in less and therefore I will have to give lower amount of interest that is visible from the calculations made.