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MindTap - Cengage Learning ng.cengage.com/static/nb/ui/index.htm?nbld-328444&mbNodeld-108129201;&deploymentld-47380243512972185977433482;&eISBN-; MindTop Assignment 05-Time Value of Money a lity such as a loan or a home mortgage. These regular payments are as annuities that consist of a principal amount and interest. Consider the following case. Amortizatien is a process in which regular payments are made to pay off a liabi considered tan loaned tis frend $25,000 to start a new business. Ean considers this loan an ne-business. Ean considers this loan an investret and requires Ns mend to pay him an interest rate of 7%, fan abo expects his friend to pay back the loan in the next four You are helping Ean figure out the annual payments he Calculste the arnual peyment and complete the following amortication schedule years by making annual payments at the end of each year the annual paymets he should receive to recover the initial loan amount and to earn 7% on his investment. Principal Payment PaidEnding Balance 1 $25,000.00 8 2 0

Explanation / Answer

Formula for loan amortization = A= [i*P*(1+i)^n]/[(1+i)^n-1] Amt $ A = periodical installment ? P=Loan amount = 25,000 i= interest rate per period = 7% n=total no of payments 4 A=[0.07*25000*1.07^4]/(1.07^4-1) A =7380.70 So Annual payment =$7,380.70 Amortization schedule Year Beginning balance Installment Ineterst Principal Ending Balance Principal   Year 1               25,000          7,380.70          1,750.00         5,630.70             19,369.30 Year 2               19,369          7,380.70          1,355.85         6,024.85             13,344.45 Year 3               13,344          7,380.70             934.11         6,446.59               6,897.86 Year 4                 6,898          7,380.70             482.85         6,897.85                       0.01

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