Question

Preferred Corporation purchases an asset and finances it with a note payable. Information regarding the transaction follows: .000 106,000 Cost of asset Amount Financed Annual Interest Rate Installment loan term Payments are made 2 years 12 times per year

Answer 1

Answer: Total interest payable under current finance arrangement Total interest payable under proposed finance arrangement Total savings in interest over loan's repayment tenure $13,754.91 $13,161.28 $593.64 ($13754.91 - $13161.28] First, monthly payment required & total interest paid for the current finance arrangement shall be calculated: Monthly Interest rate, RATE # of monthly payments of debt, NPER Loan amount, PV Balance in loan at the end, FV Monthly installment type, TYPE Equal monthly payment required 1% (12% / 12 --> Annual interest rate is converted into monthly interest rate] 24 [2 years x 12 monthly payments] $106,000 $0 [As all will be paid off over loan's tenure] 0 = 0 if installments paid at the end of each month; 1 if installments paid at the beginning of each month $4,989.79 [Ref: NOTE] Therefore, total interest paid currently $13,754.91 [(24 months x $4989.79) - $106000 --> Total installment amount minus loan amount] NOTE: Equal monthly payment required is calculated using EXCEL FUNCTION PMT(rate,nper,pv,fv,type) where rate=1%; nper=24; pv=-10600; fv=0; type=0; Here, pv is negative as it denotes cash inflow; type=0 as installments are paid at the end of each month only.

А 1 Monthly Interest rate, RATE 2 # of monthly payments of debt, NPER 3 Loan amount, PV 4 Balance in loan at the end, FV 5 Monthly installment type, TYPE 6 Equal monthly payment required B C D E F G H I J K L =12%/12 [12% / 12 --> Annual interest rate is converted into monthly interest rate] =2*12 [2 years x 12 monthly payments] $106,000 $0 [As all will be paid off over loan's tenure] 0 = 0 if installments paid at the end of each month; 1 if installments paid at the beginning of each month =PMT(B1,B2,-B3,B4,B5) [Ref: NOTE] Now, using revised monthly installments, number of monthly payments required to pay off the loan & total interst paid shall be calculated: Monthly Interest Rate, RATE Monthly installment amount, PMT Initial balance in loan account, PV Balance in account at the end, FV Monthly installment type, TYPE # of Months in which loan will be paid off 1% [12% / 12 --> Annual interest rate is converted into monthly interest rate] $5,189.79 [$4989.79 + $200] $106,000 $0 [Because all will be paid off over loan's tenure] 0 = 0 if paid at the end of each month; 1 if paid at the beginning of each month. 22.9607 [Ref: NOTE] Therefore, total interest paid $13,161.28 [(22.9607 months x $5189.79) - $106000 --> Total installment amount minus loan amount]

NOTE: # of Months in which loan will be paid off is calculated using EXCEL FUNCTION NPER(rate,pmt,pv,fv, type) where rate = 1%; pmt = -5189.79; pv = 106000; fv = 0; type=0; Here, pv is positive as it denotes cash inflow; pmt is negative as it denotes cash outflow; type=0 as installments are paid at the end of each month only. B 1 Monthly Interest Rate, RATE 2 Monthly installment amount, PMT 3 Initial balance in loan account, PV 4 Balance in account at the end, FV 5 Monthly installment type, TYPE 6 # of Months in which loan will be paid off 7 C D E F G H I J K L =12%/12 [12% / 12 --> Annual interest rate is converted into monthly interest rate] =4989.79+200) ($4989.79 + $200] $106,000 $0 [As all will be paid off over loan's tenure) 0 = 0 if installments paid at the end of each month; 1 if installments paid at the beginning of each month =NPER(B1,B2,-B3,B4,B5) [Ref: NOTE]