Aggie Company is going to trade-in an old piece of equipment for new equipment.

The following is information concerning the purchase:

List Price: $65,000

Down Payment: $6,000

Term: 5 years Interest Rate: 8%

Payments: Quarterly

Trade-in value $10,000

Determine the amount of the quarterly payment. Select one:

a. 6,595

b. 12,271

c. 2,997

d. 3,608

e. 10,397

Option C,$2,997 is the correct answer.

Explanation:

The amount to be paid in quarterly installments over a 5 year period is the list price less the down payment and the trade-in value of $10,000 as shown below.

list price $65,000

down-payment ($6,000)

trade-in-value ($10,000)

balance $49,000

The quarterly installment can be computed using the pmt formula in excel as follows:

=pmt (rate, nper,-pv, fv)

rate is the quarterly interest rate of 8%/4=2%

nper is the number of quarterly installments which is 4*5=20

pv is the present value of the amount to be paid in installments which is $49000

fv is the future value, it is not unknown, hence it is zero

=pmt (2%,20,-49,000,0)

=$2,996.68

approx.$$2,997