Question

Present value with periodic rates.

  Sam​ Hinds, a local​ dentist, is going to remodel the dental reception area and add two new workstations. He has contacted​ A-Dec, and the new equipment and cabinetry will cost $24,000. The purchase will be financed with an interest rate of 9​% loan over 8 years. What will Sam have to pay for this equipment if the loan calls for semiannual payments (2 per​ year) and monthly payments (12 per​ year)? Compare the annual cash outflows of the two payments. Why does the monthly payment plan have less total cash outflow each​ year?

-What will Sam have to pay for this equipment if the loan calls for semiannual payments (2 per​ year)?

-What will Sam have to pay for this equipment if the loan calls for monthly payments (12 per​ year)?

-Why does the monthly payment plan have less total cash outflow each​ year?

A. As more payments are made each​ year, the years of the loan are reduced and thus the interest expense is lower.

B. As more payments are made each​ year, the EAR becomes smaller and thus the interest expense is lower.

C. As more payments are made each​ year, the APR becomes smaller and thus the interest expense is lower.

D. As more payments are made each​ year, the principal is repaid quickly and thus the interest expense is lower.

Answer 1

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