Loan Repayment with increasing Installments
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4.32) Northwest Iron and Steel is considering getting involved in electronic commerce. A modest e-commerce package is available for $20,000. If a company rants to recover the cost in 2 years, what is the equivalent amount of new income that must be realized every 6 months, if the interest rate is 3% per quarter.
4.37) Fieldsaver Technologies, a manufacturer of precision laboratory equipment, borrowed $2 Million to renovate one of its testing labs. The loan was repaid in 2 years through quarterly payments that increased by $50,000 each time. At an interest rate of 3% per quarter, what was the size of the first quarterly payment.
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Solution Summary
This post answers two questions based on time value of money concept. The first question involves constant payments while the second one involves increasing cash flows. The solution helps students to understand the concepts through step-by-step explanation.
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4.32
Interest rate per quarter = 3%
Period for realization of income = 6 months.
Effective interest rate per 6 months = (1+3%)^2-1=6.09%
PV of e-commerce package = $20,000
PViF(6.09%,4)=1/r(1-1/(1+r)^n)=1/6.09%*(1-1/(1+6.09%)^4)=3.457976448
We have n=4 (4 periods of 6 month each in 2 years) and r=6.09%
Income required every 6 months =20000/3.457976448
=$5783.73
4.37
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