Monthly payment on an equipment loan
A loan's real cost is never the price tag — it's what leaves the account every month, and how much of that is interest.
Task:
You work in operations at a small coffee roastery. The team wants to finance a new espresso machine rather than pay cash: $14,400 over 3 years at 7.2% APR. Work out the monthly payment in B5, then the total interest you will pay over the life of the loan in B6.
Learning Objectives:
- Convert an annual rate and a term in years into the monthly units PMT expects
- Read the sign PMT returns as a direction of cash flow
- Work out the total interest on a loan from its monthly payment
Solve without hints for +5 XP
Interactive Spreadsheet
The data in this exercise
This is the grid you start with. Cell references in the task — B6, C2 — point at the row numbers and column letters below.
| A | B | |
|---|---|---|
| 1 | Item | Value |
| 2 | Annual interest rate | 0.072 |
| 3 | Loan term (years) | 3 |
| 4 | Loan amount | 14400 |
| 5 | Monthly payment | |
| 6 | Total interest paid |
What this exercise teaches (contains the answer)
PMT's rate and nper only agree with each other if they describe the same period: a rate that means something per year, divided by 12, describes a month, and a term in years multiplied by 12 counts in the same unit. Miss either conversion and the payment comes out twelve times too big or too small rather than merely wrong. PMT returns a negative number because Excel's finance functions read the loan as a cash flow: B4 is positive, money received now, so B5 is negative, money paid out every month after. Multiplying that monthly payment across every period in the term gives the total handed over across the whole loan, and subtracting the amount actually borrowed from that total leaves exactly the interest — the price of spreading $14,400 over three years instead of paying it up front.