9. Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards,
ID: 2724914 • Letter: 9
Question
9. Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Sutton can also lease the equipment for 5 end-of-year payments of $1,720,896 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment.
a. $137,652 b. $138,111 c. $139,265 d. $139,874 e. $135,562
Explanation / Answer
Formula to calculate yearly payments on loan: Pmt = Lr / (1-(1+r)-t)
The amount you borrow is L, the interest rate per period is r, the number of periods is t, and P is the payment per period.
= > ($6,000,000*0.10) / (1-(1+0.10)-5) = $1,582,784.88
Difference in the amounts = $1,582,784.88 - $1,720,896.00 = -$138,111
So, the payment will be $138,111 shorter than lease payment.
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