Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2014. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2014 and continuing for a total of four more years (final payment December 31, 2018). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. How much is the 2015 interest expense?
A) $3,169,880.
B) $3,290,800.
C)$4,000,000.
D)$2,790,800.

Question

Quizplus · Accepted Answer

The interest expense for 2015 is calculated on the outstanding balance after the first payment. The initial loan amount is $37,908,000. After the first payment of $10 million at the end of 2014, the outstanding balance is $37,908,000 - $10,000,000 = $27,908,000. The interest expense for 2015 is 10% of this balance: $27,908,000 * 0.10 = $2,790,800.

Alden Trucking Company Is Replacing Part of Their Fleet of Trucks