13. Creating an amortization schedule Aa Aa Ian loaned his friend $30,000 to sta

Question

13. Creating an amortization schedule Aa Aa Ian loaned his friend $30,000 to start a new business. He considers this loan to be an investment, and therefore requires his friend to pay him an interest rate of 7% on the loan. He also expects his nend to pay back the loan over the next our years by making annua payments at the endo each year ante ed and asked that you help him calculate the annual payments that he should expect to receive so that he can recover his initial investment and earn the agreed-upon 7% on his investment. Calculate the annual payment and complete the following capital recovery schedule: Beginning Amount Principal Paid Interest Year Payment Paid Ending Balance 1 $30,000.00 4 $0.01

Explanation / Answer

P = Principal Loan =

$30,000.00

R = Rate or APR =

7.00%

N = Number of payments = 5 =

                         4

PMT = Payment = P x R x (1+R)^N / ((1+R)^N - 1)

Payment = Payment in Dollars = 30000 x 7% x (1+7%)^4 / ((1+7%)^4 -1) =

$8,856.84

Now, we can complete the table:

Year

Beginning Amount

Payment

Interest Paid

Principal Paid

Ending balance

1

$30,000.00

$8,856.84

$2,100.00

$6,756.84

$23,243.16

2

$23,243.16

$8,856.84

$1,627.02

$7,229.82

$16,013.34

3

$16,013.34

$8,856.84

$1,120.93

$7,735.91

$8,277.43

4

$8,277.43

$8,856.84

$579.42

$8,277.42

$0.01

P = Principal Loan =

$30,000.00

R = Rate or APR =

7.00%

N = Number of payments = 5 =

                         4

PMT = Payment = P x R x (1+R)^N / ((1+R)^N - 1)

Payment = Payment in Dollars = 30000 x 7% x (1+7%)^4 / ((1+7%)^4 -1) =

$8,856.84

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