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Homework answers / question archive / As a small software developer firm, you have approached the AXZ Bank to obtain a term loan so that the firm can purchase a new server
As a small software developer firm, you have approached the AXZ Bank to obtain a term loan so that the firm can purchase a new server. The AXZ bank provides two (2) offers to your company, as listed below:
a) a loan of $100,000 over a five (5) year period at an interest rate of 7.65% per annum (per year) payable at the end of each month.
b) a loan of $100, 000 over a three (3) year period at an interest rate of 5.5% per annum (per year) payable at the end of each month.
Requirements
1. Calculate the monthly loan instalments for each offer listed above - a) and b).
2. Calculate the total interest payments for each offer listed above - a) and b).
1-a). We can calculate the monthly loan installments for offer 1 by using the following formula in excel:-
=pmt(rate,nper,-pv,fv)
Here,
Pmt = Monthly loan installments
Rate = 7.65%/12 = 0.6375% (monthly)
Nper = 5*12 = 60 periods (monthly)
PV = $100,000
FV = $0
Substituting the values in formula:
= pmt(0.6375%,60,-100000,0)
= $2,010.93
1-b). We can calculate the monthly loan installments for offer 2 by using the following formula in excel:-
=pmt(rate,nper,-pv,fv)
Here,
Pmt = Monthly loan installments
Rate = 5.5%/12 = 0.4583% (monthly)
Nper = 3*12 = 36 periods (monthly)
PV = $100,000
FV = $0
Substituting the values in formula:
= pmt(0.4583%,36,-100000,0)
= $3,019.59
2-a). Computation of the total interest payments for offer 1:-
Total interest paid = (Monthly loan installments * Number of months) - Principal
= ($2,010.93 * 60) - $100,000
= $120,655.83 - $100,000
= $20,655.83
b). Computation of the total interest payments for offer 2:-
Total interest paid = (Monthly loan installments * Number of months) - Principal
= ($3,019.59 * 36) - $100,000
= $108,705.25 - $100,000
= $8,705.25
