Question

13. Indigo River Banking just bought a new pet care center for 908,766 dollars. To pay for the pet care center, the company took out a loan that requires Indigo River Banking to pay the bank a special payment of 26,560 dollars in 2 months and also make regular monthly payments forever. The first regular payment is expected in 1 month and all subsequent regular payments are expected to increase by 0.48 percent per month forever. The interest rate on the loan is 1.4 percent per month. What is the payment expected to be in 1 month?

Answer 1

- Borrowed Amount Today for Pet care Centre = $908,766

Special payment will be made in 2 = $26,560

Calculating the Present value of Special payments to be made in 2 months today:-

where, Future Value = $26,560

r = periodic Interest Rate = 1.4%%

n = no of periods = 2

Present Value = $25,831.65

Value of borrowed amount left after Special Payment in today terms = $908,766 - $25,831.65

=$882,934.35

Now, Calculating the 1st regular annual payments required to be paid in 1 months:-

Where, present Value = $882,934.35

r = Periodic Interest rate = 1.4%

g = growth rate of payments = 0.48%

Regular Payments = $8123

So, the payment to be expected in 1 month is $8123

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