Mainline Sports has just acquired a new business van at a cashprice of $70,000.

Question

Mainline Sports has just acquired a new business van at a cashprice of $70,000. Unfortunately, Mainline only had $10,000available and had to finance the balance with the dealer over 5years at 9%. The sales contract calls for Mainline to make 5 equalannual year-end payments to retire the debt.

a.

What is the amount of each payment?

b.

What is Mainline's interest expense for year 2? Prepare anamortization table.

c.

What is Mainline's total interest cost over the 5-year term ofthe loan?

a.

What is the amount of each payment?

b.

What is Mainline's interest expense for year 2? Prepare anamortization table.

c.

What is Mainline's total interest cost over the 5-year term ofthe loan?

Explanation / Answer

I= rP(1 + r)n (1 + r)n - 1 where I   is the monthly payment r is the rate for each compounding period P is the amount of money loaned n is the number of compounding periods                                                          0.05 x 60,000 x (1+0.05)5 a) Amount Of Each Payment I =  ----------------------------   = 13,858                                                              (1 + 0.05)5 - 1 b) Amortization Table     ============= Interest Principal Principal Year Payment Payment Payment Remaining             0 - - - 60000 1 13858 3000 10858 49142 2 13858 2,457 11,401 37,741 3 13858 1,887 11,971 25,770 4 13858 1,289 12,569 13,201 5 13858 657 13,201 0 Mainline's Interes expense for Year 2 is 2,457 c) Mainline's total interest cost over the 5-year term of theloan is 3,000 + 2,457 + 1,887 + 1,289 + 657 = 9,290 I= rP(1 + r)n (1 + r)n - 1 where I   is the monthly payment r is the rate for each compounding period P is the amount of money loaned n is the number of compounding periods

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