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Lowlife Company defaulted on a $130,000 loan that was due on December 31, 2021. The bank...

Lowlife Company defaulted on a $130,000 loan that was due on December 31, 2021. The bank has agreed to allow Lowlife to repay the $130,000 by making a series of equal annual payments beginning on December 31, 2022. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Calculate the required annual payment if the bank’s interest rate is 10% and four payments are to be made.

2. Calculate the required annual payment if the bank’s interest rate is 8% and five payments are to be made.
3. If the bank’s interest rate is 10%, how many annual payments of $34,294 would be required to repay the debt?

4. If three payments of $51,357 are to be made, what interest rate is the bank charging Lowlife?

Solutions

Expert Solution

Part 1

Year PV factor @10% PVA factor @10%
1    0.90909            0.90909
2    0.82645            1.73554
3    0.75131            2.48685
4    0.68301            3.16987
Value of loan $        130,000
Divided: PVA factor @10% for 4 years            3.16987
Annual payment $          41,011

Part 2

Year PV factor @8% PVA factor @8%
1    0.92593            0.92593
2    0.85734            1.78326
3    0.79383            2.57710
4    0.73503            3.31213
5    0.68058            3.99271
Value of loan $        130,000
Divided: PVA factor @8% for 5 years            3.99271
Annual payment $          32,559

Part 3

Value of loan $     130,000
Divided: Annual payment $        34,294
PVA factor @10% for ??? years          3.79075
Year PV factor @10% PVA factor @10%
1    0.90909          0.90909
2    0.82645          1.73554
3    0.75131          2.48685
4    0.68301          3.16987
5    0.62092          3.79079
PVA factor @10% is 3.79075 (Rounded to 3.79079) is found when the number of years is 5.
Number of years 5 years

Part 4

Value of loan $     130,000
Divided: Annual payment $       51,357
PVA factor @??% for 3 years         2.53130
Year PV factor @8% PV factor @9% PV factor @10%
1    0.92593          0.91743         0.90909
2    0.85734          0.84168         0.82645
3    0.79383          0.77218         0.75131
PVA (total)    2.57710          2.53129         2.48685
PVA factor for 3 years is 2.53130 (Rounded to 2.53129) is found when the interest rate is 9%
Interest rate 9%

ekkarill92 answered 2 years ago
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