Debt Management

Lecture No. 13
Chapter 4
Contemporary Engineering Economics
Copyright © 2016

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
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 Credit Card Debt Management
Credit card debt and
commercial loans are
among the most
significant financial
transactions involving
interest.

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
Example 4.14: Loan Balance, Principal,
and Interest
 Given:
o P = $5,000,
o i = 12% APR,
o N = 24 months

 Find: A

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Solution

 Monthly Payment:

A = $5,000(A/P, 1%, 24)

= $235.37

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Calculating the Remaining Loan
Balance after Making the nth Payment

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Example 4.15: Loan Balance at End of Period 6

Given: P = $5,000,
i = 12% APR, N = 24
months

 Find: Loan
balance, principal,
and interest
payment for the 6th
payment

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Solution
 Monthly payment: $235.37
 Interest payment at n = 6

• Loan balance at the end

of n = 5, or beginning of
n=6

B5 =$235.37(P / A,1%,19)
=$4,054.44

• Interest payment
I6  $4,054.49(0.01)
 $40.54

• Principal payment
P6 =$235.37 - $40.54
=$194.83

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
Example 4.17: Financing Your Vehicle
Given:
• Three financing
options
• r = 4.5%
• Payment period =
monthly
• Compounding period
= monthly

 Find: Which option

is best?
Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Solution
•Option A: Conventional Debt Financing:
Pdebt = $4,500 + $736.53(P/A, 4.5%/12,
42)
− $17,817(P/F, 4.5%/12, 42)
= $17,847

•Option B: Cash Financing

Pcash = $31,020 − $17,817(P/F,4.5%/12,42)
= $15,845

•Option C: Lease Financing

Please = $1,507.76 + $513.76(P/A,
4.5%/12, 42)
+ $395(P/F, 4.5%/12, 42)
= $21,336

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved