7. Computing Annuity Payment: The Corner Bar & Grill is in the process of taking

Question

7. Computing Annuity Payment: The Corner Bar & Grill is in the process of taking a five-year loan of $50,000 with First Community Bank. The bank offers the restaurant owner his choice of three payment options: 1) Pay all of the interest (8% per year) and principal in one lump sum at the end of 5 years; 2) Pay interest at the rate of 8% per year for 4 years and then a final payment of interest and principal at the end of the 5th year; 3) Pay 5 equal payments at the end of each year inclusive of interest and part of the principal. Under which of the three options will the owner pay the least interest and why?

Explanation / Answer

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