Question

Cal Lury owes $37,000 now. A lender will carry the debt for six more years at 7 percent interest. That is, in this particular case, the amount owed will go up by 7 percent per year for six years. The lender then will require that Cal pay off the loan over the next 14 years at 10 percent interest. What will his annual payment be?

Answer 1

Initial amount for consideration (P) = $37000

Rate of interest for 6 years (r) = 7%

Time (n) = 6 years

Amount owed after 6 years (A) = P * (1 + r)^n

Therefore, A = 37000 * (1.07)^6

A = 37000 * 1.501

A = 55,537

Now after six years,

rate of interest (r1) = 10%

time (n1) = 14 years

Let the amount (X) is paid at the end of each year (equal installments)

Please find the below table in excel showing year wise calculations. I have used Goal seek function under What If analysis in excel to obtain the value of X:

As per the calculations shown in the above table, the annual payment comes out to be $7,538.94

Hope this answers your question.