Annuity payments: Mr. Bill S. Preston, Esq., purchased a new house for $90,000.

Question

Annuity payments:

Mr. Bill S. Preston, Esq., purchased a new house for$90,000. He paid $10,000 upfront and agreed to pay the rest over the next15 years in 15 equal annual payments that include principal payments plus12 percent compound interest on the unpaid balance.

a. Mr. Bill S. Preston, Esq., purchased a new house for $90,000 and paid $10,000upfront. How much does he need to borrow to purchase the house? (Round to the nearest dollar.)

b. If Bill agrees to pay the loan over the next 15 years in15 equal end-of-year payments plus12 percent compound interest on the unpaid balance, what will these equal payments be? (Round to the nearest cent.)

Explanation / Answer

Answer a

Mr. Bill S. Preston need $80,000 to borrow the house.

Answer b.

The present value of the installment must be equal to $80,000.

Let $x be the amount of installments.

Therefore, 80,000 = x*PVIFA(12%, 15)

80,000 = x*6.81086

x = $11745.95

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