Answer:
Option A)
First of all lets calculate Installment amount
Installment amount = Loan/PVIFA(r%,n)
=500000/PVIFA(12%,5 years)
=500000/3.6047
=138705$
Statement showing repayment schedule
Towards | |||||
Year | Opening balance | Installment | Interest @ 12% | Principal | Closing balance |
1 | 500000 | 138705 | 60000 | 78705 | 421295 |
2 | 421295 | 138705 | 50555 | 88150 | 333145 |
3 | 333145 | 138705 | 39977 | 98728 | 234418 |
4 | 234418 | 138705 | 28130 | 110575 | 123843 |
5 | 123843 | 138705 | 14861 | 123844 | 0 |
193524 | 500000 |
Thus total Interest = 193,524$
Option B)
Statement showing repayment of principal and Interest
Year | Interest payments | Principal payment | Total |
1 | 60000 | 60000 | |
2 | 60000 | 60000 | |
3 | 60000 | 60000 | |
4 | 60000 | 60000 | |
5 | 60000 | 500000 | 560000 |
Total | 300000 | 500000 |
Here Interest is 300,000$
Since Interest payment in option A is less than option B. Option A is preferable
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