2. Company B owes a $50,000 debt that is now due (January 1, 2016). Arrangements
ID: 2510455 • Letter: 2
Question
2. Company B owes a $50,000 debt that is now due (January 1, 2016). Arrangements have been made to pay it off in 5 equal annual installments starting December 31, 2016 (an ordinary annuity situation). Assuming 8% interest, how much will the annual payment be?
The following table values are provided for use in solving the following independent problems (show computations): n-5 Value Future value of $1 Present value of $1 Future value of annuity of $1 Present value of annuity of $1* *Ordinary annuity 6% 1.3382 -7473 5.6371 4.2124 7% 1.4026 7130 5.7507 4.1002 8% 1.4693 6806 5.8666 3.9927Explanation / Answer
Solution 1:
Amount required after 5 years = $50,000
Interest rate = 7%
Annual deposit = Future value / Future value of annuity of $1 at 7% for 5 periods
= $50,000 / 5.7507 = $8,695
Solution 2:
Amount of debt = $50,000
Rate of interest = 8%
Period of repayment = 5 years
Equal annual installments = Debt amount / Cumulative PV Factor for 5 periods at 8%
= $50,000 / 3.9927 = $12,523
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