Blue Eagle Packaging just bought a new climbing wall for 944,951 dollars. To pay

Question

Blue Eagle Packaging just bought a new climbing wall for 944,951 dollars. To pay for the climbing wall, the company took out a loan that requires Blue Eagle Packaging to pay the bank a special payment of 30,540 dollars in 3 months and also make regular monthly payments forever. The first regular payment is expected in 1 month and all subsequent regular payments are expected to increase by 0.35 percent per month forever. The interest rate on the loan is 1.19 percent per month. What is the payment expected to be in 1 month?

Explanation / Answer

Let X be the 1 month payment.

Present value of monthly payments on perpetual basis = X / ( return - growth)

Present value of special payment at the end of 3 months = 30540 / (1.019)3

Thus we can write the equation ....... X / ( 0.0119 - 0.0035) + 30540 / (1.0119)3 = 944951

X / ( 0.0119 - 0.0035) + 29475.16 = 944951

X / ( 0.0084) = 944951 - 29475.16 =  915475.84

X = 915475.84 * 0.0084 = 7690 ................... final answer

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