Question

Clearlake Optical has developed a new lens. The owners plan to issue a $8,000,000 30-year bond with a contract rate of 7.5% paid annually to raise capital to market this new lens. This means that Clearlake will be required to pay 7.5% interest each year for 30 years. To pay off the debt, Clearlake will also set up a sinking fund paying 8% interest compounded annually. What size annual payment is necessary for interest and sinking fund combined

Answer 1

$670,619.60

Step-by-step explanation:

the annual interests are $8,000,000 x 7.5% = $600,000

in order to be able to save $8,000,000 in 30 years, we need to deposit:

FV of ordinary annuity = annual payment x annuity factor

annual payment = $8,000,000 / 113.283 (FV annuity factor, 8%, 30 periods) = $70,619.60

total annual payment to cover both interests and sinking fund = $600,000 + $70,619.60 = $670,619.60