Question

Don James purchased a new automobile for $20,000. Don made a cash down payment of $5,000 and agreed to pay the remaining balance in 30 monthly installments, beginning one month from the date of purchase. Financing is available at a 24% annual interest rate. Required: Calculate the amount of the required monthly payment. Lang Warehouses borrowed $100,000 from a bank and signed a note requiring 20 annual payments of $13,388 beginning one year from the date of the agreement.

Required:

Determine the interest rate implicit in this agreement.

Answer 1

1.

Calculate the amount of the required monthly payment.

Answer: 670

2.

Determine the interest rate implicit in this agreement.

Answer: 12%

Calculation:

1.

Here, we need to calculate the amount of the required monthly payment.

For that first we need to find the amount financed.

Amount financed = Cost of equipment - Cash down payment = $20000 - $5000 = $15000

Then we need to calculate the present value of annuity.

Present value of future cash payments = $15000

r = 24% / 12 = 2%

n = 30 months.

We could either use the PVA factor table or use MS Excel.

From the table the value of PVA = (2%, 30 Years) = 22.3965

Or, =PV(2%,30,1,0,0) = 22.3965

$15000 = Payment x 22.3965

Payment = $15000 / 22.3965

Payment = $669.749 or $670.

2.

Here we need to determine the interest rate implicit in this agreement.

Amount borrowed = $100,000

Annual payments = $13,388

Present Value Factor = 100,000/13,388 = 7.46937

interest = ?

n = 20

So,

We need to take check the Present value table for the following:

n = 20

Present value factor = 7.46937

Then we get the interest rate of 12% from the present value table for 7.4693 and n is 20.