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A firm borrows $255,000 from the bank at 6 percent compounded annually to expand the production capacity. This loan is to be repaid in equal installments at the end of each year over the next 14 years. How much will each annual payment be

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Answer: $27,434.10

Explanation:

The equal installments can be considered to be annuities for the very fact that they are equal.

This means that the $255,000 that was borrowed would be the present value of this annuity.

The annuity itself can therefore be calculated as follows:

Present value of annuity = Annuity * Present value interest factor of annuity, 6%, 14 periods

255,000 = Annuity * 9.2950

Annuity = 255,000 / 9.2950

Annuity = $27,434.10

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