Question

One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $500 per month. You will charge 1.55 percent per month interest on the overdue balance. If the current balance is $14,500, how long will it take for the account to be paid off?

Answer 1

Answer:

Here we need to find the length of an annuity. We know the interest rate, the PV, and the payments. Using the PVA equation:

PVA =C({1 – [1/(1 +r)t]} /r)

$14,500 = $500{[1 – (1/1.0155)t] / 0.0155}

Now we solve for t:

1/1.0155t = 1 − {[($14,500)/($500)](0.0155)}

1/1.0155t= 0.5505

1.0155t= 1/(0.5505) = 1.817

t = ln 1.817 / ln 1.0155 = 38.83 months

Account will be paid off in 38.83 months.