Question

Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a five-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10 percent and would be amortized over five years, with five end-of-year payments. Sutton can also lease the equipment for five end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment?

Answer 1

Answer:

Ans. The loan payment is $1,582,784.88, therefore is smaller than the lease by $207,215.12

Explanation:

Hi, first we have to find out the amount to pay for the loan every year in order to verify if the loan is cheaper or more expensive than the lease, we have to use the following formula and slove it for "A".

$PresentValue=\frac{A((1+r)^{n}-1) }{r(1+r)^{n} }$

Now, we solve for A

$6,000,000=\frac{A((1+0.10)^{5}-1) }{0.10(1+0.10)^{5} }$

$6,000,000=\frac{0,61051}{0,161051} A$

$6,000,000=A(3,790786769)$

$A=1,582,785.88$

Now we can see that the lease is more expensive than the loan, this is how to find out for how much.

$1,790,000- 1.582.784,88 = 207.215,12$

Best of luck.