Your company borrows $25,000 from the bank at 12 percent compounded annually to
ID: 2648879 • Letter: Y
Question
Your company borrows $25,000 from the bank at 12 percent compounded annually to purchase some new machinery. This loan is to be repaid in equal installments at the end of each year over the next 5 years. How much will each annual payment be? What ratios would be impacted by the additional debt? How would you justify this purchase to management?
Your company is considering depositing money in one of three banks, all of which pay 5% interest; bank A compounds annually, bank B compounds semi-annually, and bank C compounds daily. Which bank would you choose? Why?
The process of discounting and compounding are related. Explain the relationship and the significance of understanding this to management or stockholders.
Explanation / Answer
Your company borrows $25,000 from the bank at 12 percent compounded annually to purchase some new machinery. This loan is to be repaid in equal installments at the end of each year over the next 5 years. How much will each annual payment be? What ratios would be impacted by the additional debt? How would you justify this purchase to management?
Solution-
Pmt No.
Beginning Balance
Scheduled Payment
Total Payment
Principal
Interest
Ending Balance
Beginning Balance
1
25000.00
471.78
471.78
367.61
104.17
24632.39
25000.00
2
24632.39
471.78
471.78
369.15
102.63
24263.24
24632.39
3
24263.24
471.78
471.78
370.68
101.10
23892.56
24263.24
4
23892.56
471.78
471.78
372.23
99.55
23520.33
23892.56
5
23520.33
471.78
471.78
373.78
98.00
23146.55
23520.33
6
23146.55
471.78
471.78
375.34
96.44
22771.21
23146.55
7
22771.21
471.78
471.78
376.90
94.88
22394.31
22771.21
8
22394.31
471.78
471.78
378.47
93.31
22015.84
22394.31
9
22015.84
471.78
471.78
380.05
91.73
21635.79
22015.84
10
21635.79
471.78
471.78
381.63
90.15
21254.16
21635.79
11
21254.16
471.78
471.78
383.22
88.56
20870.94
21254.16
12
20870.94
471.78
471.78
384.82
86.96
20486.12
20870.94
13
20486.12
471.78
471.78
386.42
85.36
20099.70
20486.12
14
20099.70
471.78
471.78
388.03
83.75
19711.66
20099.70
15
19711.66
471.78
471.78
389.65
82.13
19322.02
19711.66
16
19322.02
471.78
471.78
391.27
80.51
18930.74
19322.02
17
18930.74
471.78
471.78
392.90
78.88
18537.84
18930.74
18
18537.84
471.78
471.78
394.54
77.24
18143.30
18537.84
19
18143.30
471.78
471.78
396.18
75.60
17747.12
18143.30
20
17747.12
471.78
471.78
397.83
73.95
17349.28
17747.12
21
17349.28
471.78
471.78
399.49
72.29
16949.79
17349.28
22
16949.79
471.78
471.78
401.16
70.62
16548.63
16949.79
23
16548.63
471.78
471.78
402.83
68.95
16145.81
16548.63
24
16145.81
471.78
471.78
404.51
67.27
15741.30
16145.81
25
15741.30
471.78
471.78
406.19
65.59
15335.11
15741.30
26
15335.11
471.78
471.78
407.88
63.90
14927.22
15335.11
27
14927.22
471.78
471.78
409.58
62.20
14517.64
14927.22
28
14517.64
471.78
471.78
411.29
60.49
14106.35
14517.64
29
14106.35
471.78
471.78
413.00
58.78
13693.34
14106.35
30
13693.34
471.78
471.78
414.73
57.06
13278.62
13693.34
31
13278.62
471.78
471.78
416.45
55.33
12862.16
13278.62
32
12862.16
471.78
471.78
418.19
53.59
12443.98
12862.16
33
12443.98
471.78
471.78
419.93
51.85
12024.04
12443.98
34
12024.04
471.78
471.78
421.68
50.10
11602.36
12024.04
35
11602.36
471.78
471.78
423.44
48.34
11178.93
11602.36
36
11178.93
471.78
471.78
425.20
46.58
10753.72
11178.93
37
10753.72
471.78
471.78
426.97
44.81
10326.75
10753.72
38
10326.75
471.78
471.78
428.75
43.03
9898.00
10326.75
39
9898.00
471.78
471.78
430.54
41.24
9467.46
9898.00
40
9467.46
471.78
471.78
432.33
39.45
9035.13
9467.46
41
9035.13
471.78
471.78
434.13
37.65
8600.99
9035.13
42
8600.99
471.78
471.78
435.94
35.84
8165.05
8600.99
43
8165.05
471.78
471.78
437.76
34.02
7727.29
8165.05
44
7727.29
471.78
471.78
439.58
32.20
7287.70
7727.29
45
7287.70
471.78
471.78
441.42
30.37
6846.29
7287.70
46
6846.29
471.78
471.78
443.25
28.53
6403.03
6846.29
47
6403.03
471.78
471.78
445.10
26.68
5957.93
6403.03
48
5957.93
471.78
471.78
446.96
24.82
5510.98
5957.93
49
5510.98
471.78
471.78
448.82
22.96
5062.16
5510.98
50
5062.16
471.78
471.78
450.69
21.09
4611.47
5062.16
51
4611.47
471.78
471.78
452.57
19.21
4158.90
4611.47
52
4158.90
471.78
471.78
454.45
17.33
3704.45
4158.90
53
3704.45
471.78
471.78
456.35
15.44
3248.11
3704.45
54
3248.11
471.78
471.78
458.25
13.53
2789.86
3248.11
55
2789.86
471.78
471.78
460.16
11.62
2329.70
2789.86
56
2329.70
471.78
471.78
462.07
9.71
1867.63
2329.70
57
1867.63
471.78
471.78
464.00
7.78
1403.63
1867.63
58
1403.63
471.78
471.78
465.93
5.85
937.70
1403.63
59
937.70
471.78
471.78
467.87
3.91
469.82
937.70
60
469.82
471.78
469.82
467.87
1.96
0.00
469.82
The annual payment will be 471.78.
The ability to re-pay is give sureity your total debt does not excees a certain percentage of your income.This percentage is called the debt ratio.
If the debt ration is high bank not give any loan to you.
This purchase for management is good because in long term company make profit easily with that machine.
Your company is considering depositing money in one of three banks, all of which pay 5% interest; bank A compounds annually, bank B compounds semi-annually, and bank C compounds daily. Which bank would you choose? Why?
Solution-
I would choose Bank C because bank C compound continuously pays the highest interest.
This occurs because..
The process of discounting and compounding are related. Explain the relationship and the significance of understanding this to management or stockholders.
Solution-
The compounding and discounting are the inverse or just opposite process of each other.
Shown through mathematical in the compounding equation:
FVn = PV(1+i)n
Now,
The discounting equation by multiplying each side of this equation by 1/(1+i)n and we can get the result......
PV=FVn 1/(1+i)n
Pmt No.
Beginning Balance
Scheduled Payment
Total Payment
Principal
Interest
Ending Balance
Beginning Balance
1
25000.00
471.78
471.78
367.61
104.17
24632.39
25000.00
2
24632.39
471.78
471.78
369.15
102.63
24263.24
24632.39
3
24263.24
471.78
471.78
370.68
101.10
23892.56
24263.24
4
23892.56
471.78
471.78
372.23
99.55
23520.33
23892.56
5
23520.33
471.78
471.78
373.78
98.00
23146.55
23520.33
6
23146.55
471.78
471.78
375.34
96.44
22771.21
23146.55
7
22771.21
471.78
471.78
376.90
94.88
22394.31
22771.21
8
22394.31
471.78
471.78
378.47
93.31
22015.84
22394.31
9
22015.84
471.78
471.78
380.05
91.73
21635.79
22015.84
10
21635.79
471.78
471.78
381.63
90.15
21254.16
21635.79
11
21254.16
471.78
471.78
383.22
88.56
20870.94
21254.16
12
20870.94
471.78
471.78
384.82
86.96
20486.12
20870.94
13
20486.12
471.78
471.78
386.42
85.36
20099.70
20486.12
14
20099.70
471.78
471.78
388.03
83.75
19711.66
20099.70
15
19711.66
471.78
471.78
389.65
82.13
19322.02
19711.66
16
19322.02
471.78
471.78
391.27
80.51
18930.74
19322.02
17
18930.74
471.78
471.78
392.90
78.88
18537.84
18930.74
18
18537.84
471.78
471.78
394.54
77.24
18143.30
18537.84
19
18143.30
471.78
471.78
396.18
75.60
17747.12
18143.30
20
17747.12
471.78
471.78
397.83
73.95
17349.28
17747.12
21
17349.28
471.78
471.78
399.49
72.29
16949.79
17349.28
22
16949.79
471.78
471.78
401.16
70.62
16548.63
16949.79
23
16548.63
471.78
471.78
402.83
68.95
16145.81
16548.63
24
16145.81
471.78
471.78
404.51
67.27
15741.30
16145.81
25
15741.30
471.78
471.78
406.19
65.59
15335.11
15741.30
26
15335.11
471.78
471.78
407.88
63.90
14927.22
15335.11
27
14927.22
471.78
471.78
409.58
62.20
14517.64
14927.22
28
14517.64
471.78
471.78
411.29
60.49
14106.35
14517.64
29
14106.35
471.78
471.78
413.00
58.78
13693.34
14106.35
30
13693.34
471.78
471.78
414.73
57.06
13278.62
13693.34
31
13278.62
471.78
471.78
416.45
55.33
12862.16
13278.62
32
12862.16
471.78
471.78
418.19
53.59
12443.98
12862.16
33
12443.98
471.78
471.78
419.93
51.85
12024.04
12443.98
34
12024.04
471.78
471.78
421.68
50.10
11602.36
12024.04
35
11602.36
471.78
471.78
423.44
48.34
11178.93
11602.36
36
11178.93
471.78
471.78
425.20
46.58
10753.72
11178.93
37
10753.72
471.78
471.78
426.97
44.81
10326.75
10753.72
38
10326.75
471.78
471.78
428.75
43.03
9898.00
10326.75
39
9898.00
471.78
471.78
430.54
41.24
9467.46
9898.00
40
9467.46
471.78
471.78
432.33
39.45
9035.13
9467.46
41
9035.13
471.78
471.78
434.13
37.65
8600.99
9035.13
42
8600.99
471.78
471.78
435.94
35.84
8165.05
8600.99
43
8165.05
471.78
471.78
437.76
34.02
7727.29
8165.05
44
7727.29
471.78
471.78
439.58
32.20
7287.70
7727.29
45
7287.70
471.78
471.78
441.42
30.37
6846.29
7287.70
46
6846.29
471.78
471.78
443.25
28.53
6403.03
6846.29
47
6403.03
471.78
471.78
445.10
26.68
5957.93
6403.03
48
5957.93
471.78
471.78
446.96
24.82
5510.98
5957.93
49
5510.98
471.78
471.78
448.82
22.96
5062.16
5510.98
50
5062.16
471.78
471.78
450.69
21.09
4611.47
5062.16
51
4611.47
471.78
471.78
452.57
19.21
4158.90
4611.47
52
4158.90
471.78
471.78
454.45
17.33
3704.45
4158.90
53
3704.45
471.78
471.78
456.35
15.44
3248.11
3704.45
54
3248.11
471.78
471.78
458.25
13.53
2789.86
3248.11
55
2789.86
471.78
471.78
460.16
11.62
2329.70
2789.86
56
2329.70
471.78
471.78
462.07
9.71
1867.63
2329.70
57
1867.63
471.78
471.78
464.00
7.78
1403.63
1867.63
58
1403.63
471.78
471.78
465.93
5.85
937.70
1403.63
59
937.70
471.78
471.78
467.87
3.91
469.82
937.70
60
469.82
471.78
469.82
467.87
1.96
0.00
469.82
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