Consider Gizmo, a small manufacturing company whose management wishes to reduce overhead by installing a new, energyefficient
Question:
Consider Gizmo, a small manufacturing company whose management wishes to reduce overhead by installing a new, energy‐efficient heating system. The new system costs $100,000. Due to the company’s insufficient cash reserves, the management has decided that borrowing money is the only way to finance the desired improvement. A problem arises when Gizmo’s accountant points out that a standard direct reduction loan would severely strain the firm’s cash flow during the heating season. In order to overcome this difficulty, the accountant suggests a periodic linear gradient series repayment scheme with the gradient G = $75 in a skip payment loan. The accountant proposed the following repayment schedule:
Length of Loan: Four Years
Month Repay
Jan–Aug.................................Yes
Sep–Apr...............................Skip
May–Sep...............................Yes
Oct–Mar...............................Skip
Apr–Oct.................................Yes
Nov–Feb...............................Skip
Mar–Dec...............................Yes
The lender has quoted an APR of 12%. Determine the repayment schedule over four years.
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