Answer:
- Dell must repay $1,728,198.18 at the end of each year.
- $2,097,387.29 out of the total repaid amount is interest expense.
Explanation:
- EOY equal repayment calculation:
We apply the present value formula for annuity to calculate the equal repayment amount Dell needs to make in the next 7 years.
Denote C is equal repayment, PV is present value of the loan which is $10 million, i is interest rate which is 5%, n is the number of repayments which is 7.
We have: C = (PV x i) / [ 1 - (1+i)^-n] => C = (10,000,000 x 5%) / ( 1 -1.05^(-7)) = $1,728,198.18.
- Interest expense calculation:
Total repayment made: 1,728,198.18 x 7 = $12,097,387.29.
Total interest expense = Total repayment made - principal amount = 12,097,387.29 - 10,000,000 = $2,097,387.29
