Question

(c) You have a loan outstanding. It requires making five annual payments at the end of the next five years of Sh. 40,000 each. Your bank has offered to restructure the loan so that instead of making five payments as originally agreed, you will make only one final payment at the end of the loan in five years. If the interest rate on the loan is 5.63%, what final payment will the bank require you to make so that it is indifferent between the two forms of payment?

Answer 1

Solution:

We will calculate the future value of the five-year payment of 40,000 at a 5.63% interest rate:

$$FV=C* \dfrac{(1+r)^{time}}{rate}$$

$C=Sh.40,000$

$time=5$

$rate=0.0563$

Calculation:

$FV=40,000* \dfrac{(1+0.0563)^{5}-1}{0.0563}$

$FV=Sh.223824$

Answer:

The payment at the end of the five years will be $Sh.223824$