Question

Talitha will sell her bicycle shop to you for R250 000, with seller financing at a 6% nominal annual rate. The terms of the loan will require you to make 12 equal end-of-month payments per year for four years, and then make an additional final (balloon) payment of R50 000 at the end of the last month. What will your equal monthly payments be?

Answer 1

Explanation:

To calculate the equal monthly payments under this loan, we can use the formula for the present value of an annuity due, since the payments are due at the end of each period. The present value of the equal monthly payments can then be set equal to the loan amount of R250,000, and we can solve for the payment amount.

First, we need to calculate the present value factor for an annuity due with 12 payments per year over a four-year period, using a nominal annual rate of 6%.

PVIFA(due) = (1 - (1 + r/n)^(-nt))/((r/n)(1 + r/n))

Where:

r = nominal annual rate = 6%

n = number of compounding periods per year = 12

t = number of years = 4

PVIFA(due) = (1 - (1 + 0.06/12)^(-12*4))/((0.06/12)(1 + 0.06/12)) = 43.232

Next, we can use the formula for the present value of an annuity due to calculate the equal monthly payments:

PMT = PV / PVIFA(due)

Where:

PV = present value of the loan = R250,000

PMT = 250000 / 43.232 = R5,785.97

Therefore, your equal monthly payments will be R5,785.97. At the end of the four-year period, you will also need to make a final balloon payment of R50,000 to fully pay off the loan.