Question

If you borrow $7,500 with an interest rate of 7 percent to be repaid in six equal payments at the end of the next 6 years, what would be the amount of each payment? Use Exhibit 1-D

Answer 1

$1,573.27

Step-by-step explanation:

We can compute an equal annual payment by using the annuity formula.

`P = (A(1-(1+r)^(-n)) )/(r)`

where P = the amount borrowed

r = interest rate

n = tenor (number of periods)

A = the annual equal payment

=
`7,500 = (A(1-(1.07)^(-6)) )/(0.07)`

= 7,500 = (A * (1 - 0.6663))/0.07

= 7,500 = (A * 0.3337)/0.07

= A = 7,500*0.07/0.3337

= A = Each Annual Payment = $1,573.27.