Question

Joe Electric, Inc. is unable to pay some outstanding debts. They have a loan for $11,000 which was due on March 1,2019 and another for $6,000 which was due on November 1, 2019 both at 6.0% interest. Joe, the company owner, has made arrangements to payoff the two outstanding loans at 6.5% interest on September 10, 2019 What will be the final payment amount on September 10,2009 to satisfy all of Joe Electric, Inc.’s debts if the agreed upon focal date is August 1, 2020? Draw a timeline as part of your solution.

2. Joe has a personal debt owing to his father as well. He was supposed to make a payment of $2,100 6 months ago and $3,250 today. Instead He made a payment 3 months ago for $2,975 and will pay the balance in 3 months. What is the amount of the final payment Joe will make in 3 months if money is worth 6% and the agreed upon focal date was 3 months ago? Draw a timeline as part of your solution.

Answer 1

1)

Assumption:

· I am assuming only Simple Interest.

· 10/09/2019 is taken as 1/9/2019 to avoid days problem, only month is countable.

On September 10, 2019

The focal date is the date of the last payment (1/08/2020).

At this date (01/08/2020), the amount of the debt is

11000 + 11000 * 6% * 6/12 + 11000 *6.5% * 11/12 + 6000 + 6000 * 6.5% * 9/12

= 11000 + 330 + 655.41 + 6000 + 292.5

= 18277.91

Now 18277.91 is the amount Joe has to pay on 01/08/2020.

If he wants to settle this amount on 10/09/2019, he has to Discount this amount by using 6.5% Interest rate. There are 11 months in between

Discounted Present Value of 18277.91 on 10/09/2019 = 18277.91 / (1 + 0.065*11/12) = 17250/-

2)

Language in the question is not very clear or some part is missing. I am trying my best to solve this question.

Let Suppose Today is 01/07/2019, therefore 3250 is Due today

6 Month ago, on 01/01/2019, 2100 is due.

3 Month ago, on 01/04/2019, he made a Payment of 2975

· First Try to Calculate Outstanding Amount on 1/04/2019

= 2100 + 2100 * 6% * 3/12

= 2131.5

· He made a Payment of 2975, which is 2975 - 2131.5 = 843.5 extra.

Today on 01/07/2019, 3250is due out of which we have to setoff 843.5.

Therefore, Remaining Amount is to be pay today = 3250 – 843.5 = 2406.5

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