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 six months. John will make 18 equal monthly payments, beginning October 1, 2016. The annual interest rate implicit in this agreement is 24%.(EV of $1. PV of $ 1, FYA of $1, PVA 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. onthly payment

Explanation / Answer

We can use the present value of annuity formula to calculate the monthly payment necessary for John to pay for his purchases. PV of annuity = P*{[1 - (1+r)^-n]/r} PV of annuity = present value of installment payments = $1300 P = Monthly payment = ? r = interest rate per month = 24%/12 = 2% n = no.of monthly payments = 18 1300 = P*{[1 - (1+0.02)^-18]/0.02} 1300 = P*14.99203 P = $86.71 The monthly payment necessary for John to pay for his purchases = $86.71

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