Question

A new startup borrowed $300,000 from the bank to purchase office equipment. The interest rate on the loan is 12% per year payable in equal installments for the next 3 years. What is the size of the equal annual installments?

Answer 1

$130,000 per year

Step-by-step explanation:

To establish how much is paid in annual installments, we firstly have to calculate the simple intereest on the amount borrowed.

Simple interest = Principal x rate x time

100%

where:

principal = $300,000

rate = 12%

time = 3 years

we have,

SI = $300,000 x 12% x 3yrs

100%

SI = $90, 000

This means that for the period of 3 years, the interest on the $300,000 is $90,000.

The total amount to be repaid is $300,000 + $90,000 = $390,000.

Since the payment is for over a period of 3 years, the amount payable every year is $390,000

3

= $130,000 per annum.

Cheers.