Due to new air pollution standards, a company needs to invest in a new $150,000
ID: 2749934 • Letter: D
Question
Due to new air pollution standards, a company needs to invest in a new $150,000 environmental control technology. They have two options: either take out a loan or to purchase it themselves. a) If the company chooses to borrow the $150,000 from a bank with a repayment period of 20 years and an annual interest rate of 9% per year on the unpaid balance. What is the annualized annual payment over the term of the loan? i. What is the total interest paid? b) If the company decides to pay for the equipment themselves 5 years from now by using their company savings account paying 8% interest, how much should the company save each year? c) Which option is less expensive for the company?
Explanation / Answer
(a) PVAF @9% for 20 years = 9.1285
Annualized annual payments = $150000/9.1285
= $16432
Statement showing calculation of total interest calculation of Total interest
Thus, Total interest paid = $178640
(b) Interest on savings account = 8%
Interest to bhe lost = 8% x 150000 x PVAF @9% for 6-20 years
Interest to be lost = 150000 x 8% x 5.2389
= 62867
Savings in interest = 178640 - 62867 = 115773
(c) It is adviced to purchase the assets themselve since it results in interest savings of 115773
Year Opening balance outstanding (A) Installment (B) Interest [A x 9%] (C) Principal repayment [B-C] (D) Closing balance [A-D] 1 150000 16432 13500 2932 147068 2 147068 16432 13236 3196 143872 3 143872 16432 12948 3484 140388 4 140388 16432 12635 3797 136591 5 136591 16432 12293 4139 132452 6 132452 16432 11921 4511 127941 7 127941 16432 11515 4917 123024 8 123024 16432 11072 5360 117664 9 117664 16432 10590 5842 111822 10 111822 16432 10064 6368 105454 11 105454 16432 9491 6941 98513 12 98513 16432 8866 7566 90947 13 90947 16432 8185 8247 82700 14 82700 16432 7443 8989 73711 15 73711 16432 6634 9798 63913 16 63913 16432 5752 10680 53233 17 53233 16432 4791 11641 41592 18 41592 16432 3743 12689 28903 19 28903 16432 2601 13831 15072 20 15072 16432 1360 15072 0 Total 328640 178640 150000Related Questions
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