Question

***You can use a calculator but I just need the work written out so I can see what you did and how you did it***

I need the answer for number 4 which is based on number 3. Please answer number 4 based on number 3. Number 4 can be found at the bottom. Thank you!

3. A business takes out a loan for $250,000 at 4.8% interest compounded monthly. If the business can afford to make monthly payments of only $1,500 on the loan, what is the formula to calculate the number of months required to repay the loan completely? What is the formula result?

The ANSWER for this is N = 276

Now, for the question I need, which is number 4:

Redo your calculations from question #3 to assume that the business can afford only a $1,000 payment. What is the revised formula and resulting value?

Answer 1

Loan Amount = $250,000
Interest Rate= 4.8% compounded monthly
Monthly Payments = $1,500

In financial terms,
PV = $250,000
PMT = $1,500
Periodic Interest Rate = 4.8/12 = 0.4% compounded monthly
We have to find no of years.

By using the formula to calculate Number of Periods in excel. The formula is
NPer(Rate, PMT, Present Value, Future Value, Type)
where,
Rate = Interest Rate
PMT = Periodic Payments
Type is 0 if PMT are made on the end of year and 1 if the payments are made at the beginning of year.

Using the formula
N = 276 Years (Upper rounding)


Now, revised monthly payments = $1,000
In financial terms,
PV = $250,000
PMT = $1,000
Periodic Interest Rate = 4.8/12 = 0.4% compounded monthly
Periodic Interest = $250,000 * 0.4% = $1,000

Since amount of PMT is equal to periodic interest only, the Monthly payments will cover up interest portion only. Therefore no of years will be undefined because no repayment is done towards principal. Hence the loan amount remains outstanding like this till infinite period if payments of only $1,000 are made.

The formula is NPer(Rate, PMT, Present Value, Future Value, Type)
Resulting Value = Undefined/Infinite