On January 2, 2020, Bridgeport Company borrowed $174,000 from Lyon Country Bank. The terms of the loan agreement specified 4 equal annual payments at 4% annual interest. Compute the amount of each of these payments, assuming they begin on December 31, 2020.

annual payment = $50,460

Explanation:

In order to solve this, we will use the formula for calculating simple interest on an invested amount over a period of time.

Simple interest = Principal × Rate × Time

Where:

Principal = $174,000

Rate = 4% = 4/100 = 0.04

Time = 4 years (4 annual payments)

∴ Simple interest = 174,000 × 0,04 × 4 = $27,840

Total amount to be paid = principal + interest

= 174,000 + 27,840 = $201,840

since 4 equal annual payments were made, the amount to be repaid is divided into 4. This is done as follows:

annual payments = 201,840 ÷ 4 = $50,460