13. Creating an amortization schedule Aa Aa Ian loaned his friend $25,000 to sta

Question

13. Creating an amortization schedule Aa Aa Ian loaned his friend $25,000 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 10% on the loan. He also expects his friend to pay back the loan over the next four years by making annual payments at the end of each year. Ian texted 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 10% on his investment. Calculate the annual payment and complete the following capital recovery schedule: Beginning Year Amount 1 $25,000.00 Interest Paid Principal Paid Payment Ending Balance 4 $0.00

Explanation / Answer

Equated Annual installment = Amount of Loan / PVAF(10%, 4 years) = $7886.77

Capital Recovery Schedule: Year Beginning Amount Payment Interest paid Principal paid Ending Balance 1 $25,000.00 $7,886.77 $2,500.00 $5,386.77 $19,613.23 2 $19,613.23 $7,886.77 $1,961.32 $5,925.45 $13,687.78 3 $13,687.78 $7,886.77 $1,368.78 $6,517.99 $7,169.79 4 $7,169.79 $7,886.77 $716.98 $7,169.79 $0.00

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