Question

ABC Manufacturing is building a new facility that will cost $44 M. ABC will borrow $40 M from the First National Bank at 7% interest compound annually.

ABC evaluates two payment plans:

1. Make payment at end of each year for next (10) years, including principles and interest of the year. What is the total of Future Payment (Fv) at the end of the 10^th year?

2. Make no annual payments until at the end of the 10^th year. What is the total of Future Payment (Fv) at the end of the 10^th year?

Solve the problem by all three methods:

• Equations
• Functional Notation, and
• Excel Formula

Answer 1

Cost of Project = $44,000,000
Borrowings = $40,000,000		@7.0%
Options for Repayments:
Annual payments for 10 Years
Onetime payment at the end of 10th year (FV):
FV = P (1+R)^n
=40,000,000 x (1+0.07)^10
= $78,686,054.29
Making annual payments for 10 years, compound Interest payable will be:
= P {(1+R)^n - 1}
=$40,000,000 x {(1+0.07)^10 - 1}
=$38,686,054.29
Total one time Payable by 10th year = $40,000,000 + $38,686,054.29
$78,686,054.29