Kenworth Imaging got a $700,000 loan that came with a choice of two different repayment schedules. In Plan 1, the company would have to repay the loan in 4 years with four equal payments at an interest rate of 10% per year. In Plan 2, the company would repay the loan in 3 years, with each payment twice as large as the preceding one. How much larger in dollars was the final payment in Plan 2 than the final payment in Plan 1?
What will be an ideal response?
Plan 1: A = 700,000(A/P,10%,4)
= 700,000(0.31547)
= $220,829
Plan 2: Let x = amount of first payment
700,000 = x(P/F,10%,1) + 2x(P/F,10%,2) + 4x(P/F,10%,3)
700,000 = x(0.9091) + 2x(0.8264) + 4x(0.7513)
5.5671x = 700,000
x = 125,739
4x = $502,955
Difference = 502,955 - 220,829 = $282,126
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