Question

11. 20 Fort Schuyler Engineering, Inc., has borrowed $800,000. for new calibra- tion equipment. The loan is at a nominal rate of 5.97%, compounded monthly, for a term of five years. (a) If the loan is to be repaid quarterly, what will be the amount of the payment? (b) What is the financial advantage of repaying the loan quarterly rather than monthly, if any?

Answer 1

(a)If repaid Quarterly

PV=A×PVAF(r,n)

Here PV=Present Value=$800000;

PVAF=Present Value Annuity Factor;

r=5.97/100(1/4)=0.014925

n=5years×4=20

So,substituting values into formula,

$800000=A×PVAF(0.014925,20)

$800000=A×17.1813388981

A = $46562

Total sum of payment is $46562×20=$931240.

(2)

If the payment is made monthly

PV=A×PVAF(r,n)

Here PV=Present Value=$800000;

PVAF=Present Value Annuity Factor;

r=5.97/100(1/12)=0.004975

n=5years×12=60

So,substituting values into formula,

$800000=A×PVAF(0.004975,60)

$800000=A×51.762902126

A = $15455

Total sum of payment is $15455×60=$927300

There is no benefit in the given case, If the payments are made quarterly, as he had to make an extra payment of $3940(931240-927300) when compared with monthly payment.