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9 January, 15:25

The manager of a manufacturing company knows that they will need a new machine in one of their factories. The new machine will cost them $12,500. The manager has determined that they can afford to pay 10% of the cost of the machine in cash. They can then finance the rest through a credit union. The credit union will charge 2% per year compounded monthly. How much are their monthly payments for 4 years

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  1. 9 January, 17:44
    0
    8720Answer:

    $244 per month

    Explanation:

    Monthly payment includes the payment of interest and principal as well. We cannot simply divide the total amount with numbers of payment because there is compounding interest which is behaving differently.

    As per given data

    Total machinery cost = $12,500

    Advance payment = $12,500 x 10% = $1,250

    Financing amount = $12,500 - $1,250 = $11,250

    Use following formula to calculate monthly payment.

    Loan Payment per month = r (PV) / 1 - (1 + r) ^-n

    r = rate per period = 2% per year = 2%/12 per month

    n = number months = 4 years x 12 months per year = 48 Months

    PV = present value of all payments = $11,250

    Placing values in the formula

    Loan Payment per month = 2%/12 ($11,250) / 1 - (1 + 2%/12) ^-48

    18.75

    Loan Payment per month = $244 per month
  2. 9 January, 17:53
    0
    The monthly payment is $ 244.07

    Explanation:

    The monthly payment van be computed using the pmt formula in excel, which is = pmt (rate, nper,-pv, fv)

    rate is the monthly rate on balance after the down payment which is 2%/12=0.001666667

    nper is the number of monthly payments required in 4 years i. e 12*4=48

    pv is the amount to be paid after deducting the down payment of 10%

    $12,500 - ($12,500*10%) = $11,250

    The future value of the repayments is not known, it zero.

    =pmt (0.001666667,48,-11250,0)

    pmt=$244.07
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