Exercise 6-16 Deferred annuities; solving for annuity amount [LO6-7, 6-8] On Apr

Question

Exercise 6-16 Deferred annuities; solving for annuity amount [LO6-7, 6-8] On April 1, 2016, John Vaughn purchased appliances from the Acme Appliance Company for $1,300. In order to increase sales, Acme allows customers to pay in installments and will defer any payments for si months. John will make 18 equal monthly payments, beginning October 1, 2016. The annual interest rate implicit in this agreement is 24%. (FV of $1 PV of S 1. FVA of $1 p A of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: Calculate the monthly payment necessary for John to pay for his purchases. Monthly payment

Explanation / Answer

EMI = [P x R x (1+R)^N]/[(1+R)^N-1], where P stands for the loan amount or principal, R is the interest rate per month, and N is the number of monthly instalments.

P = $1,300

R = 24% Per Annum= 2% per Month = 0.02 per month

N = 18 months

EMI = [$1,300 X 0.02 X (1+0.02)^18] / [(1+0.02)^18-1]

= [$1,300 X0.02 X1.42825]/[1.42825-1]

= $ 37.1345/0.42825

= $ 86.7122

Note: Table Used is FV of $1

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