I Need Help! Sum of Digits Finance Leases

Hi,

Please can someone help me I am really confused I cannot get my head around sum of digits finance lease.

n(n+1)/2 I just cannot get it to work

Andy leases an item of plant worth £10,000 over 5 years and pays £2,200 per annum in rentals.
What will his interest expense be in year 2, using the sum of digits method?
Choose one:
• £587
• £333
• £267
• £133


Any help would be much appreciated

Thanks

Kate


Comments

  • MindTheGAAPMindTheGAAP Posts: 17Registered
    Period B/F Interest Repayment C/F
    1 10,000.00 333.33 -2,200.00 8,133.33
    2 8,133.33 266.67 -2,200.00 6,200.00
    n(n+1)/2 where n = term

    Sum of the digits term = (5 x (5 + 1)) / 2 = 15
    (This is the same as doing 5 + 4 + 3 + 2 + 1)

    Total due: 10,000
    Total repayments: 2,200 x 5 = 11,000
    Total interest: (11,000 - 10,000) = 1,000

    Interest formula: Total interest x remaining term / Sum of the digits term

    Year 1 interest: ((1,000 x 5) / 15) = 333.33
    Year 2 interest: ((1,000 x 4) / 15) = 266.67
    MAAT AATQB
  • K_L_WhiteK_L_White Posts: 7Registered
    Thank you very much, yes I understand it a bit more now lol
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