I Need Help! Sum of Digits Finance Leases

K_L_White

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

MindTheGAAP

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

K_L_White

Thank you very much, yes I understand it a bit more now lol