A business needs equipment costing $\text{₦}500{,}000$ and is considering two financing options.

Option 1: A bank loan at 5 % per annum simple interest, repayable in equal annual installments over 4 years.

Option 2: A hire‑purchase arrangement with 5 equal annual payments. Each payment consists of a principal component equal to 20 % of the cash price and interest charged at 6 % per annum on the outstanding balance (reducing‑balance method).

(a) Calculate the total amount paid under each option.
(b) Which option results in the lower total payment?

Question

A business needs equipment costing $\text{₦}500{,}000$ and is considering two financing options.

Option 1: A bank loan at 5 % per annum simple interest, repayable in equal annual installments over 4 years.

Option 2: A hire‑purchase arrangement with 5 equal annual payments. Each payment consists of a principal component equal to 20 % of the cash price and interest charged at 6 % per annum on the outstanding balance (reducing‑balance method).

(a) Calculate the total amount paid under each option.
(b) Which option results in the lower total payment?

Accepted Answer

Option 1 total = 600000; Option 2 total = 590000; Cheaper option = Option 2

Gce Model Questions Vol1 2025 Commerce Question 3

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