Ines Corporation bought a new machine and agreed to pay for it in equal annual instalments of $10,000 at the end of each of the next four years.The payments include both interest and principal.The rate of interest for this transaction is 8%.The total amount of interest that Ines will pay is closest to?

Question

Quizplus · Accepted Answer

The total amount of interest paid can be determined by first calculating the present value of the annuity (the series of equal payments) and then subtracting this present value from the total payments made over the period. The present value of an annuity formula is PV = P * [(1 - (1 + r)^-n) / r], where P is the payment amount, r is the interest rate per period, and n is the number of periods. Here, P = $10,000, r = 0.08, and n = 4. The present value (PV) represents the principal amount of the loan. The total payments made will be $10,000 * 4 = $40,000. The interest paid is the difference between the total payments and the principal amount. Calculating the present value gives us the principal, and the difference between the total payments and this principal gives us the total interest paid.

Ines Corporation Bought a New Machine and Agreed to Pay