Question

On January 2, 2017, Jensen Company borrowed $198,000 from Lyon Country Bank. The terms of the loan agreement specified 4 equal annual payments at 8% annual interest. (Use the below table.)

Compute the amount of each of these payments, assuming they begin on December 31, 2017. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Periodic Payments: $

Answer 1

On January 2, 2017, Jensen Company borrowed $198,000 from Lyon Country Bank. The terms of the loan agreement specified 4 equal annual payments at 8% annual interest.

Compute the amount of each of these payments, assuming they begin on December 31, 2017.

.

Periodic Payments: $59780

.

Solution calculation:

Calculate loan payments:

r (rate) = 8%

P (principal) = $198000

n (number of payments) = 4

.

Here the the principle amount is the present value of equal annual payments. For calculating annual equal payment (annuity), use the present value equation

Equation is:

PV = A * PVIFA

Where,

A = Annuity = equal annual payment

PV = Present value = Principal amount = $198000

PVIFA = Present value of interest factor annuity

= PVIFA 8%, 4 period = ( 1 / ( 1 + 8% ))^4GT = 3.31213

*Find it from PV interest factor annuity table

.

198000 = A * 3.31213

A = 198000 / 3.31213 = 59780

*Equal payment of $59780 is needed to repay the full amount for 4 period