Question

M&B Tooling Ltd. is assessing two available options for the purchase of new equipment with a negotiated cash price of $100,000. The manufacturer is willing to accept a down payment of 20% of the purchase price and an instalment note for the balance. The note would require quarterly fixed principal payments (plus interest) starting October 1, 2020, for a period of two years. M&B has a proposal from its bank for an instalment loan for two years that requires a fixed blended monthly payment (including both principal and interest) starting August 1, 2020. The loan would be for 80% of the equipment’s purchase price. The current market rate of interest is 8%. Both contracts have an interest rate of 8%.

Calculate the amount of the payments required of M&B under each alternative. (Round answers to 2 decimal places, e.g. 5,275.25.)

Quarterly fixed principal + interest payments option with manufacturer:

Total amount of payments

$

Fixed blended monthly instalment note with the bank including principal and interest:

Total amount of payments

$

Answer 1

Quarterly fixed principal + interest payments option with manufacturer:
Total amount of payments	$   87,200.00
a)
Cost of new equipment	$ 100,000.00
Less: 20% Down payment	$ (20,000.00)
Installment Note	$   80,000.00
Period = 2 x 4	8
Rate  = 8%/4	2.00%
Amortization Schedule
$80,000.00 at 2% interest with 8 quarterly payments
at Constant Principal Payments of $10000
Period	Payment Amount	Principal Amount	Interest Amount	Payment Owed
1	$   11,600.00	$ 10,000.00	$  1,600.00	$ 70,000.00
2	$   11,400.00	$ 10,000.00	$  1,400.00	$ 60,000.00
3	$   11,200.00	$ 10,000.00	$  1,200.00	$ 50,000.00
4	$   11,000.00	$ 10,000.00	$  1,000.00	$ 40,000.00
5	$   10,800.00	$ 10,000.00	$     800.00	$ 30,000.00
6	$   10,600.00	$ 10,000.00	$     600.00	$ 20,000.00
7	$   10,400.00	$ 10,000.00	$     400.00	$ 10,000.00
8	$   10,200.00	$ 10,000.00	$     200.00	$              -
Total	$   87,200.00	$ 80,000.00	$  7,200.00
b) Fixed blended monthly instalment note with the bank including principal and interest:
Total amount of payments	$86,836.40
Cost of new equipment	$ 100,000.00
Less: 20% Down payment	$ (20,000.00)
Bank Loan	$   80,000.00
Period = 2 x 12	24
Rate  = 8%/12	0.67%
Monthly Payment	$3,618.18
Total Payments = $3618.18 x 24	$86,836.40