Question

Barry Rich is a business major at State U. He will be graduating this year and is planning to start a consulting business. He will need to purchase computer equipment that costs $27,000. He can borrow the money from the local bank but will have to make annual payments of principal and interest. To determine the appropriate discount factorfs) using tables, click here to view Tables I, Il, III, or IV in the appendix. Alternatively, if you calculate the discount factor(s) using a formula, round to six (6) decimal places before using the factor in the problem.
Required
a. Compute the annual payment Barry will be required to make on a $27,000, four-year, 5 percent loan Round your answer to the nearest dollar amount.)
b. If Barry can afford to make annual payments of $5,800, how much can he borrow? (Round your answer to the nearest dollar amount.)

Answer 1

Answer:

$7,614.32  

$20,566.51

Explanation:

The annual payment Barry would make is computed using the pmt formula in excel found below:

=pmt(rate,nper,-pv,fv)

rate is the loan interest of 5%

nper is the duration of the loan which is 4 years

pv is the amount borrowed which is $27,000

fv is the total amounts to be repaid which is unknown

=pmt(5%,4,-27000,0)=$ 7,614.32  

However,if Barry can afford to pay $5,800 annually,his loan amount is computed using the pv formula

=-pv(rate,nper,pmt,fv)

=-pv(5%,4,5800,0)=$20,566.51