Question

The production of polyamide from raw materials of plant origin, such as castor oil, requires 20% less fossil fuel than conventional production methods. Darvon Chemicals borrowed $6 million to implement the process. If the interest rate on the loan is 10% per year (on unrecovered balance) for 10 years, what is the amount of interest for year 2?

Answer 1

Answer:

$562,350

Explanation:

Data provided in the question:

Amount borrowed = $6 million = $6,000,000

Interest rate, i = 10%

duration, n = 10 years

Now,

The annual payment is calculated as:

Annual payment = $\textup{Amount borrowed}\times(\frac{i(1+i)^n}{(1+i)^n-1})$

on substituting the respective values, we get

Annual payment = $\ \textup{6,000,000}\times(\frac{0.1(1+0.1)^{10}}{(1+0.1)^{10}-1})$

or

Annual payment = $6,000,000 × 0.16275

or

Annual payment = $976,500

Remaining Principle after 1 year = Amount after interest - Annual payment

= $6,000,000 × (1 + 0.10) - $976,500

= $5,623,500

Therefore,

the interest for the year 2

= Remaining Principle after 1 year × Interest rate

= $5,623,500 × 0.1

= $562,350