Question

A small industrial contractor purchased a warehouse building for storing equipment and materials that are not immediately needed at construction job sites. The cost of the building was $100,000 and the contractor has just made an agreement with the seller to finance the purchase over a 5-year period. The agreement state that monthly payments will be made based on a 30-year amortization, but the balance owed at the end of year 5 must be paid in a lump-sum "balloon" payment. What is the size of the balloon payment, if the interest rate on the loan is 6% per year? Compound monthly

Answer 1

t = 30*12 = 360 months

i = 6%/12 = 0.5% per month

Monthly loan payment = 100000*(A/P,0.5%,360)

= 100000 * 0.005*((1 + 0.005)^360)/((1 + 0.005)^360-1)

= 100000 * 0.005*((1.005)^360)/((1.005)^360-1)

= 100000*0.005995505

= 599.55

No. of payments left after paying for 5 yrs = 360 - 5*12 = 300

Principal outstanding after paying for 5 yrs = 599.55*(P/A,0.5%,300)

= 599.55* ((1 + 0.005)^300-1)/(0.005*(1 + 0.005)^300)

= 599.55* ((1.005)^300-1)/(0.005*(1.005)^300)

= 599.55* 155.206864

= 93054.28