The Dell Corporation borrowed $ 10,000,000 at 5 % interest per year, which must be repaid in equal EOY amounts (including both interest and principal) over the next seven years. How much must Dell repay at the end of each year? How much of the total amount repaid is interest?

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Business

Cecilia Maxwell

11 February, 18:09

The Dell Corporation borrowed $ 10,000,000 at 5 % interest per year, which must be repaid in equal EOY amounts (including both interest and principal) over the next seven years. How much must Dell repay at the end of each year? How much of the total amount repaid is interest?

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Edward Meza · Answer 1

- Dell must repay $1,728,198.18 at the end of each year.

- $2,097,387.29 out of the total repaid amount is interest expense.

Explanation:

- EOY equal repayment calculation:

We apply the present value formula for annuity to calculate the equal repayment amount Dell needs to make in the next 7 years.

Denote C is equal repayment, PV is present value of the loan which is $10 million, i is interest rate which is 5%, n is the number of repayments which is 7.

We have: C = (PV x i) / [ 1 - (1+i) ^-n] = > C = (10,000,000 x 5%) / (1 - 1.05^ (-7)) = $1,728,198.18.

- Interest expense calculation:

Total repayment made: 1,728,198.18 x 7 = $12,097,387.29.

Total interest expense = Total repayment made - principal amount = 12,097,387.29 - 10,000,000 = $2,097,387.29