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Difficulty: MediumHire Purchase, Deferred Payment, and Credit Sale Schemes

A commercial bakery acquires a heavy-duty industrial generator under a hire purchase agreement. The cash price of the generator is ₦3,200,000₦3,200,000. The agreement requires an initial deposit of 25%25\% of the cash price, with the remaining balance paid in 1010 equal monthly installments of ₦270,000₦270,000 each. What is the total hire purchase interest charged on this transaction in Naira?

Answer: 300000 NGN

Answer

The total hire purchase interest charged on the transaction is 300,000 NGN.
The total financial outlay under the hire purchase agreement consists of the 25%25\% deposit (₦800,000₦800,000) plus the 1010 monthly installments of ₦270,000₦270,000 (₦2,700,000₦2,700,000), totaling ₦3,500,000₦3,500,000. Subtracting the cash price of ₦3,200,000₦3,200,000 yields a total hire purchase interest (carrying charge) of ₦300,000₦300,000.

Step-by-Step Solution

1
Calculate the initial deposit amount
Initial deposit = ₦800,000
The deposit is 25% of the cash price of ₦3,200,000 (0.25 × 3,200,000 = 800,000).
2
Calculate the cumulative total of all monthly installment payments
Total installments = ₦2,700,000
10 monthly installments of ₦270,000 equal 10 × 270,000 = 2,700,000.
3
Calculate the total hire purchase price
Total hire purchase price = ₦3,500,000
Total Hire Purchase Price = Initial Deposit + Total Installments = 800,000 + 2,700,000 = 3,500,000.
4
Deduct the cash price from the total hire purchase price to determine the total finance/interest charge
Total interest = ₦300,000
Interest = Total Hire Purchase Price - Cash Price = 3,500,000 - 3,200,000 = 300,000.

Key Concept

Calculation of total hire purchase price and carrying charges (interest)
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Topics

Hire Purchase, Deferred Payment, and Credit Sale Schemes

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