a) Suppose you have three personal loans outstanding to your friend El

QUESTION

a) Suppose you have three personal loans outstanding to your friend Elizabeth. A payment of $1,000 is due today, a $1,500 payment is due one year from now, and a $2,500 payment is due two years from now. You would like to consolidate the three loans into one, with 36 equal monthly payments, beginnin
If we consilidate all the three loan into one,
Total number of years = 3
If we are making monthly payments, then the number of years becomes number of periods.
Number of periods = 3yrs * 12 = 36 months
Interest rate = 8%
The method is to compute the PV of three loans and then compute a 36-month annuity payment with the same PV.
NPV = $1,677.30
This method assumes calculating the effective annual interest rate:
EAR = ( 1 A / m)^m 1 If we substitute the values, we get 0.6434% per month
Annual percentage rate (APR) = 0.6434% * 12 = 7.72%
Calculating the monthly payment using excel sheet:
Step1: Go to

l and click “insert” to insert the function.
Step2: Select the “PMT” function as we are finding the monthly payment in this case.
Step3: Enter the values as Rate = 7.72% / 12; Nper = 36; PV = 1677.30 ; FV = 0
Step4: Click “OK” to get the desired value.
The value comes to “$52.34”
The payment will be indicated with negative sign as it is cash outflow for us.
Therefore, the monthly payment is $52 per month.

ANSWER:

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