Pflug
Ltd. signed an installment note on January 1, 2011 in settlement of an account
payable of $40,000 owed to Mott Ltd. Pflug is able to borrow funds from its
bank at 11%, whereas Mott can borrow at the rate of 10%. The note calls for two
equal payments of blended principal and interest to be made at December 31,
2011, and 2012. Calculate the amount of the equal installment payments that will
be made to Mott Ltd.
The relevant interest rate to be imputed on the
installment note is the rate Pflug would pay at its bank of 11%
Using Ordinary Annuity Tables for 11% for two periods,
the factor of 1.71252 is used and divided into the present value amount of
$40,000 to arrive at the amount of the equal installment payment of $23,357.39
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Using a financial calculator:
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PV
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$ (40,000)
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I
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11%
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N
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2
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PMT
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?
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Yields $ (23,357.35)
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FV
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$ 0
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Type
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0
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