A small industrial contractor purchased a warehouse building for storing equipment and materials that are not immediately needed at construction job sites. The cost of the building was $100,000 and the contractor has just made an agreement with the seller to finance the purchase over a 5-year period. The agreement states that monthly payments will be made based on a 30-year repayment schedule of interest on the unrecovered balance of the principal; however, the total remaining balance of principal and interest at the end of year 5 must be paid in a lump-sum “balloon” payment. What is the size of the balloon payment, if the interest rate on the loan is 0.5% per month?

Question

What will be an ideal response?

Answer 1

Monthly payment = 100,000(A/P,0.5%,360)
= 100,000(0.00600)
= $600
Balloon payment = 100,000(F/P,0.5%,60) – 600(F/A,0.5%,60)
= 100,000(1.3489) – 600(69.7700)
= $93,028