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Example 2-A.6

The lease rentals for as-year contract an: Rs 300/Rs 1,000 payable annually in arrears. Assuming no salvage value, compute the rate of interest implied by the contract and develop a lease amortization schedule.

Solution

The implied rate of interest, i, = Rs 300 x PVIFA '(i, 5) = Rs 1.000
PVIFA (i. 5) = 3.333 (The PVIFA closet to 3.333 is 3.52 at 15 per cent)
PVIFA (15. 5) (Table A-4) = 3.352
Therefore,  i = 0.15 = 15 per cent,

EXAMPLE 2-A.7

A hire-purchase plan requires a hire to pay Rs 91.68 per thousand per month (ptpm) in arrears over a 12-month period. Assuming a cash purchase price of Rs 1.000 and no salvage value (a) compute the effective rate of interest implied by the plan. (b) develop the repayment schedule from the viewpoint of the hire and (c) calculate the effective and the nominal rates of interest per annum.

Solution

(a) The implied effective rate of interest. i. (c) Effective rate of interest and nominal rate of interest per annum
Effective rate or interest- (1.015) - 1 = 0.1956 = 19.56·per cent
Nominal rate of interest per annum = 0.015 * 12 = 0.18 = 18 per cent

EXAMPLE 2-A.8

A lease contract involves payment of Rs 27 ptpm at the end of every month over a 5-year period. Develop a annual repayment Schedule inherent in the contract.

Solution

Annual rate of interest (i) = (Rs 27 * 12) * PVIFA (i. 5) = Rs 1.000 Repayment Schedule Based on Equivalent Annual Installments

The required repayment schedule can be obtained by deducting the interest on interest of Rs 33 |i.e. Rs 351- (Rs 21 x 12)| from the interest and installment amount of the repayment schedule based on equivalent annual installments.

Required Repayment Schedule