Question

3. Your firm is buying a piece of equipment. The payments are $1236 per month for five years with an additional "balloon" payment (final payment) of $10,000 at the end of year five. The interest rate is 3.5%. a. What is the original cost of the equipment? b. What would the monthly payment be for a loan for the original cost of the equipment if the loan is paid monthly with no balloon payment?

Answer 1

Given, monthly instalment, MI = $1236 n = 5 years = 5 times 12 = 60 months final payment = $10,000 interest rate = 3.5% per annum r = 3.5%/12 = 0.292% per month M.I = Pr(1 + r)^n/(1 + r)^n -1 1236 = p(0.00292)(1 + 0.00292)^60/(1 + 0.00292)^60-1 p = 1236 times (1.19118-1)/(0.00292)(1.19118) = $67,936 original cost of equipment = p + 10,000 = $77,936 M.I = $1417.934 similar $1418 monthly payment = $1418