One way to recover invested capital with interest is to collect the principal P over n years as P?n and also collect the interest on the unrecovered balance. Assume you borrowed $6000 at 10% per year interest with a repayment period of 3 years to purchase a new network controller for your company. (a) Use the method above to determine the amount of each of the three payments. (b) Determine the amount of each payment if they are all equal.
What will be an ideal response?
(a) Capital recovery = P/n = 6000/3
= $2000 per year
Interest, year 1 = 6000(0.10)
= $600
Payment, year 1 = 2000 + 600
= $2600
Interest, year 2 = (unrecovered balance)(0.10)
= 4000(0.10)
= $400
Payment, year 2 = 2000 + 400
= $2400
Interest, year 3 = (unrecovered balance)(0.10)
= 2000(0.1)
= $200
Payment, year 3 = 2000 + 200
= $2200
(b) A = 6,000(A/P,10%,3)
= 6,000(0.40211)
= $2,412.66
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