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1 September, 22:25

One of your customers is delinquent on his accounts payable balance. You've mutually agreed to a repayment schedule of $500 per month. You will charge 1.55 percent per month interest on the overdue balance. If the current balance is $14,500, how long will it take for the account to be paid off?

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  1. 1 September, 22:48
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    Here we need to find the length of an annuity. We know the interest rate, the PV, and the payments. Using the PVA equation:

    PVA = C ({1 - [1 / (1 + r) t]} / r)

    $14,500 = $500{[1 - (1/1.0155) t] / 0.0155}

    Now we solve for t:

    1/1.0155t = 1 - {[ ($14,500) / ($500) ] (0.0155) }

    1/1.0155t = 0.5505

    1.0155t = 1 / (0.5505) = 1.817

    t = ln 1.817 / ln 1.0155 = 38.83 months

    Account will be paid off in 38.83 months.
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