Question

In: Economics

Electronics Inc. purchased a machine for $140,000. They borrow $120,000 from the bank at annual 4%...

Electronics Inc. purchased a machine for $140,000. They borrow $120,000 from the bank at annual 4% nominal rate. The loan agreement requires monthly repayments over the next 6 years. How much is the monthly repayment amount?

a. 1,650

b. 2,065

c. 1,907

d. 1,877

Solutions

Expert Solution

Explanation : To find the annuity value we use following formula


Where,
PV = Initial Amount OR Initial Deposit OR Initial Investment OR Amount at time zero

A = Regular Withdrawal Amount OR Regular Interest OR Regular Dividend OR Installment Amount

n = Number of Years/Period

r = Compound Interest Rate

r(p)=Annual Nominal Rate of Interest

Given :

Number of Periods/Years (n) =6

Rate Of Interest (r(12)) =4%

Present Value (PV) = $120000


Calculating Effective Interest Rate
Effective Interest can be calculated by following formula,


where
r=Effective Rate of Interest

r(p)=Nominal rate of interest compounded p- times a year

Therefore,


After substituting the values into the formula we have,


.


Amount paid monthly

The amount paid monthly is $1877.42197.

Option d

Rahul Sunny answered 2 years ago
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