An engineer borrowed $3000 from a bank, payable in six equal end-of-year payment

Question

An engineer borrowed $3000 from a bank, payable in six equal end-of-year payments at 8%. The bank agreed to reduce the interest on the loan if interest rate declined in the United States before the loan was fully repaid. At the end of three years, at the time of the third payment, the bank agreed to reduce the interest rate from 8% to 7% on the remaining debt. What was the amount of the equal annual end-of year payments for each of the first three years? Wat was the amount of the equal annual end-of-year payments for each of the last three years?

Explanation / Answer

Amount of equal annual payment = Loan amount /PVAF@8%,6

                                                               = 3000 / 4.62288

                                                                = $ 648.95 per year

2)

Loan outstanding at year3 = 1672.38

Amount of equal annual payment = outstanding loan /PVAF@7%,3

                                                            = 1672.38 / 2.62432

                                                            = $ 637.26 per year

year Beginning balance (A) Interest B= (A* .08) Installment(C) Principal D=(C-B) Loan balance at end (A- D) 1 3000 240 648.95 408.95 2591.05 2 2591.05 207.28 648.95 441.67 2149.38 3 2149.38 171.95 648.95 477 1672.38

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