Emerson Processing borrowed $900,000 for installing energy-efficient lighting an

Question

Emerson Processing borrowed $900,000 for installing energy-efficient lighting and safety equipment in its La Grange manufacturing facility. The terms of the loan were such that the company could pay interest only at the end of each year for up to 5 years, after which the company would have to pay the entire amount due. If the interest rate on the loan was 12% per year and the company paid only the interest for 4 years, determine the following:
(a) The amount of each of the four interest payments
(b) The amount of the final payment at the end of the year

Explanation / Answer

a)Let the interest payments be x $900,000 = x/1.12 +x/1.12^2 +x/1.12^3 + x/1.12^4 + ($900,000+x)/1.12^4 x= $108,000 amount of each of the four interest payments =$108,000 b) final amount =$108,000+$900,000=$1,008,000

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