2. You borrow S10,000 to pay for your expected college costs over the next four
ID: 2819129 • Letter: 2
Question
2. You borrow S10,000 to pay for your expected college costs over the next four years, including a master degree. Two years from now, you determine that you need an additional S4,000 so you take out a second loan to borrow this additional amount. Starting four years from the original loan (two years after the second loan), you begin to repay your combined debt by making annual payments of S2.880. You will make these payments for 10 years. a. Draw a cash flow diagram of this situation from your perspective. If the interest rate is 12% compounded annually, how much do you still owe on his loan (after 10 years of $2,880 annual payments)? b.Explanation / Answer
Ans 1 Year Cash Flow Comments 0 10000 Borrowed 1 2 4000 Borrowed 3 4 2880 Loan Repayment 5 2880 Loan Repayment 6 2880 Loan Repayment 7 2880 Loan Repayment 8 2880 Loan Repayment 9 2880 Loan Repayment 10 2880 Loan Repayment 11 2880 Loan Repayment 12 2880 Loan Repayment 13 2880 Loan Repayment Ans 2 Balance of 12,245 Year Principal Interest@12% Payment Balance 0 10,000 1,200 11,200 1 11,200 1,344 12,544 2 12,544 1,505 18,049 Closing Balance includes additional loan of 4000 3 18,049 2,166 20,215 4 20,215 2,426 2,880 19,761 5 19,761 2,371 2,880 19,252 6 19,252 2,310 2,880 18,683 7 18,683 2,242 2,880 18,045 8 18,045 2,165 2,880 17,330 9 17,330 2,080 2,880 16,529 10 16,529 1,984 2,880 15,633 11 15,633 1,876 2,880 14,629 12 14,629 1,755 2,880 13,504 13 13,504 1,621 2,880 12,245
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