Equal annual instalments required to repay a loan in 3 years.

A sum of Rs.6000 is borrowed at 10% pa compounded interest and paid back in three equal annual instalments.

What is the approximate amount of each instalment?

Solutions

Expert Solution

SOLUTION :

Borrowed amount = Rs.6000

Paid back in 3 equal annual instalments.

Interest rate , r = 10% = 0.10 in decimals (annually compounded)

=> (1 + r) = 1.10

Let the annual instalment be Rs. X .

The PV of the 3 instalments discounted at the indicated rate of interest should be equal to the amount of borrowing.

So, PV of Rs. X paid annually for 3 years and discounted at the rate 0f 10%

= Rs. 6000

=> X/1.1 + X/1.1^2 + X/1.1^3 = 6000

=> X(1/1.1 + 1/1.1^2 + 1/1.1^3) = 6000

=> X * 2.48685 = 6000

=> X = 6000/2.48685 = 2412.69 (Rs)

The approximate amount of each instalment is = Rs 2412.69 (ANSWER)

The approximate amount of each instalment is = Rs 2412.69

Tulsiram Garg answered 2 years ago

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