Companies frequently borrow money under an arrangement that requires them to make periodic payments of only interest and then pay the principal of the loan all at once. A company that manufactures odour control chemicals borrowed $400,000 for 3 years at 10% per year compound interest under such an arrangement. What is the difference in the total amount paid between this arrangement (Plan 1) and Plan 2, in which the company makes no interest payments until the loan is due and then pays it off in one lump sum?
Added by Kevin J.
Step 1
The company has borrowed $400,000 at a 10% annual compound interest rate. Under Plan 1, they pay interest annually but do not pay off the principal until the end of 3 years. Under Plan 2, they make no payments until the end of 3 years, at which point they pay off Show more…
Show all steps
Your feedback will help us improve your experience
Lottie Adams and 91 other Microeconomics educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Key Concepts
Recommended Videos
A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it entered into. The loan is at 8% interest compounded annually. The present value of 1 (single sum) at 8% for 3 years is 0.7938. The present value of an annuity (series of payments) at 8% for 3 years is 2.5771. The present value of the loan (rounded) is: Multiple Choice $15,876. $20,000. $25,195. $7,761. $51,542.
Niamat K.
4-5. How much interest is payable each year on a loan of $2,000 if the interest rate is 10% per year when half of the loan principal will be repaid as a lump sum at the end of four years and the other half will be repaid in one lump-sum amount at the end of eight years? How much interest will be paid over the eight-year period? (4.4)
Prashant B.
Some lending institutions calculate the monthly payment $M$ on a loan of $L$ dollars at an interest rate $r$ (expressed as a decimal) by using the formula $$M=\frac{L r k}{12(k-1)}$$ where $k=[1+(r / 12)]^{12 t}$ and $t$ is the number of years that the loan is in effect. Business loan The owner of a small business decides to finance a new computer by borrowing $\$ 3000$ for 2 years at an interest rate of $7.5 \%$ Find the monthly payment. Find the total interest paid on the loan.
Inverse, Exponential, and Logarithmic Functions
Exponential Functions
Recommended Textbooks
Principles of Economics
Principles of Microeconomics for AP® Courses
Economics
Transcript
Watch the video solution with this free unlock.
EMAIL
PASSWORD