Compute debt service payments for each scenario. Compare total annual payments owed in each scenario.

The first step necessary in answering this question is to identify the variables needed for the payment calculation:

present value [PV]

number of compounding periods [N]

interest per compounding period [I/Y]

Let’s look at Scenario #1, Sherman Bank, first.

present value is $8,000,000 compounding periods are 20 interest rate of 7% per compounding period The second scenario, for Clayton Bank, is slightly more complicated because this lender requires monthly payments with a monthly compounding interest rate.
Again, the present value is $8,000,000 number of compounding periods is 240 (20 12)
monthly interest rate of 0.5% (6% 12)
Now that you have the input variables, simply enter them into your finance calculator or Excel spreadsheet to calculate debt service payments. Annual debt service payments for Sherman Bank equal $755,143 and for Clayton Bank total $687,774 ($57,314 12). Simply looking at the numbers, annual debt service payments would be less for Clayton Bank than for Sherman Bank.