Question

On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest be paid each year on July 31. The present value of an annuity factor for 3 years at 6% is 2.6730. The present value of a single sum factor for 3 years at 6% is 0.8396. The payment each July 31 will be:

Answer 1

Answer:

The payment each July will be $11,223.34

Explanation:

Equal payments made at the end of each year for 3 years implies that the payments form an annuity, whose present value today is $30,000.

$PVof an ordinary annuity= \frac{PMT[1-(1+i)^{-n} ] }{i}$

where PMT is the ammortising payment ie the equal payment made at the end of each period  and

$\frac{[1-(1+i)^{-n} ] }{i}$ = The present value of an annuity factor for n years at i%

For this question:

$30,000= PMT* 2.6730$

$PMT = \frac{30,000}{2.6730} = 11,223.34$