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Savola owns Samba bank 7 annual payments in 2024,2025,2026,2027,2028,2029,2030 Each payment is 1,000,000 SAR Samba charges 5% per year interest compound Also Savola own Alraghi bank one future payment in 2026 that is 3,000,000 SAR Alraghi charges 5% per year interest compound D) Which option is better for SAVOLA considering only the interest paid to the bank? A option A: to to make it one payment in 2030 B Option C: to make 10 annual payments C Option B: to make it one payment in 2020
Savola owns Samba bank 7 annual payments in 2024,2025,2026,2027,2028,2029,2030 Each payment is 1,000,000 SAR Samba charges 5% per year interest compound Also Savola own Alraghi bank one future payment in 2026 that is 3,000,000 SAR Alraghi charges 5% per year interest compound D) Which option is better for SAVOLA considering only the interest paid to the bank? A option A: to to make it one payment in 2030 B Option C: to make 10 annual payments C Option B: to make it one payment in 2020
Expert Solution
If the question is whether to pay in 2030 or in 2020 or equally over a period of time to pay the least amount of interest, then the answer is that he should pay in 2020, since the cost of interest is minimal with this option. Right now the obligation is:
7 * 1000000 + 3000000 = 10000000
However if he pays now he needs to pay only 7237133. Pls see table below for calculations. The correct answer is C. pay in 2020
| Time | Samba | Alraghi | Total | PV = Total / 1.05^Time | |
| 2020 | 0 | 0 | 0 | ||
| 2021 | 1 | 0 | 0 | ||
| 2022 | 2 | 0 | 0 | ||
| 2023 | 3 | 0 | 0 | ||
| 2024 | 4 | 1000000 | 1000000 | 822702 | |
| 2025 | 5 | 1000000 | 1000000 | 783526 | |
| 2026 | 6 | 1000000 | 3000000 | 4000000 | 2984862 |
| 2027 | 7 | 1000000 | 1000000 | 710681 | |
| 2028 | 8 | 1000000 | 1000000 | 676839 | |
| 2029 | 9 | 1000000 | 1000000 | 644609 | |
| 2030 | 10 | 1000000 | 1000000 | 613913 | |
| Total PV | 7237133 |
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