Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2016. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2016 and continuing for a total of four more years (final payment December 31, 2020). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. The amount of principal that is paid at December 31, 2016 is:
A)$32,908,000.
B)$31,698,800.
C)$40,000,000.
D)$27,908,000.

Question

Quizplus · Accepted Answer

The principal paid at December 31, 2016 is the difference between the annual payment and the interest for the first year. The interest for the first year is $3,790,800 (10% of $37,908,000), so the principal paid is $10,000,000 - $3,790,800 = $6,209,200. The remaining principal after the first payment is $37,908,000 - $6,209,200 = $31,698,800.

Alden Trucking Company Is Replacing Part of Its Fleet of Trucks