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Homework answers / question archive / Lowlife Company defaulted on a $120,000 loan that was due on December 31, 2021
Lowlife Company defaulted on a $120,000 loan that was due on December 31, 2021. The bank has agreed to allow Lowlife to repay the $120,000 by making a series of equal annual payments beginning on December 31, 2022. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
1. Calculate the required annual payment if the bank's interest rate is 10% and four payments are to be made.
2. Calculate the required annual payment if the bank's interest rate is 8% and five payments are to be made.
3. If the bank's interest rate is 10%, how many annual payments of $37,856 would be required to repay the debt?
4. If three payments of $48,254 are to be made, what interest rate is the bank charging Lowlife?
| 1. Computation of Amount of Annual payment: |
| Annual payment = $120,000 / PVAF @10%, for 4 year |
| = $120,000 / 3.1699 |
| Annual payment = $37,856.08 |
| 2. Computation of Amount of Annual payment: |
| Annual payment = $120,000 / PVAF @ 8% for 5 Year |
| = $120,000 / 3.9927 |
| Annual Payment = $30,054.85 |
| 3. Computation of No. of Annual Payment Made: |
| $120,000 = $37,856 * PVA of $1 (10%, n) |
| PVA of $1 (10%, n) = $120,000/$37,856 |
| PVA of $1 (10%, n) = 3.1699 |
| As per Present Value Table , n = 4 |
| Hence, No. of Annual payment wil be 4. |
| 4. Computation of Interest Rate: |
| $120,000 = $48,254 * PVA of $1 (i%, 3) |
| PVA of $1 (i%, 3) = $120,000/$48,254 |
| PVA of $1 (i%, 3) = 2.4868 |
| As per Present Value Table , i = 10% |
| Hence, Interest Rate Charged will be 10% |
