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L10: Debt Management

Learn to analyze loan payments, lump sum repayment, buying vs. leasing decisions, and compare interest rates for debt management in engineering and industrial systems. Understand key financial concepts to make informed decisions.

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L10: Debt Management

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  1. L10: Debt Management ECON 320 Engineering Economics Mahmut Ali GOKCE Industrial Systems Engineering Computer Sciences

  2. Debt Management

  3. $20,000 48 1 2 24 25 0 Applications—Loan Analysis Given: APR = 8.5%, N = 48 months, and P = $20,000 Find: A A = $20,000(A/P,8.5%/12,48) = $492.97

  4. $20,000 48 1 2 24 25 0 Suppose you want to pay off the remaining loan in lump sum right after making the 25th payment. How much would this lump be? $492.97 $492.97 25 payments that were already made 23 payments that are still outstanding P = $492.97 (P/A, 0.7083%, 23) = $10,428.96

  5. Example 3.7 Loan Repayment Schedule $5,000 i = 1% per month 1 2 3 4 5 6 7 22 23 24 0 A = $235.37

  6. Practice Problem • Consider the 7th payment ($235.37) • (a) How much is the interest payment? • (b) What is the amount of principal payment?

  7. $5,000 i = 1% per month 1 2 3 4 5 6 7 22 23 24 0 A = $235.37 Solution Interest payment = ? Principal payment = ?

  8. Solution

  9. Cash Outlay for Buying : $25,886 Down payment: $2,100 Car Loan at 8.5% (48 payments of $466): $22,368 Sales tax (at 6.75%): $1,418 Accounting Data - Buying vs. Lease • Cash Outlay for Leasing : $15,771 Lease (48 payments of $299) : $14,352 Sales tax (at 6.75%): $969 Document fee: $450 Refundable security deposit (not included in total) : $300

  10. Example 3.9 Buying versus Lease Decision

  11. Which Interest Rate to Use to Compare These Options?

  12. Your Earning Interest Rate = 6% • Debt Financing: Pdebt = $2,000 + $372.55(P/A, 0.5%, 36) - $8,673.10(P/F, 0.5%, 36) = $6,998.47 • Lease Financing: Please = $495 + $236.45 + $236.45(P/A, 0.5%, 35) + $300(P/F, 0.5%, 36) = $8,556.90

  13. Summary • Financial institutions often quote interest rate based on an APR. • In all financial analysis, we need to convert the APR into an appropriate effective interest rate based on a payment period. • When payment period and interest period differ, calculate an effective interest rate that covers the payment period. Then use the appropriate interest formulas to determine the equivalent values

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