Question

A company buys a machine for $12,000, which it agrees to pay for in five equal annual payments, beginning one year after the date of purchase, at an annual interest rate of 4%. Immediately after the second payment, the terms are changed such that the company can pay off the loan immediately in a lump sum during the following year. What is the final single payment?

Answer 1

Answer:

$7,778.35

Explanation:

At year 3, the final payment of the remaining balance is equal to the present worth P of the last three payments.

First, calculate the uniform payments A:

A = 12000(A/P, 4%, 5)

= 12000(0.2246) = 2695.2  (from the calculator)

Then take the last three payments as its own cash flow.

To calculate the new P:

P = 2695.2 + 2695.2(P/A, 4%, 2) = 2695.2 + 2695.2(1.886) = 7778.35

Therefore, the final payment is $7,778.35