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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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AMORTIZATION SCHEDULE

  1. a. Set up an amortization schedule for a $19,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 8% compounded annually.
  2. b. What percentage of the payment represents interest and what percentage represents principal for each of the 3 years? Why do these percentages change over time?

a.

Summary Introduction

To prepare: The amortization schedule.

Introduction:

Amortization:

Amotization means to write off or pay the debt over the priod of time it can be for a loan or intangible assets. Its puprpose is to get the cost recovery. Example of amortization is ,an automobile company that spent $20 million dollars on a design patent with a useful life of 20 years. The amortization value for that company will be $1 million each year.

Explanation

Calculate annual installments of $19,000 to be paid equally for 3 years with 8% interest.

Formula to calculate annual payment is,

PVA=PMT×(1I1I(1+I)N)

Where,

  • PVA is the future value of annuity.
  • PMT is the payment amount.
  • I is the interest rate.
  • N is the number of period.

Substitute $ 19,000 for PVA, 8% for I and 3 for N.

$19,000=PMT×(10

b

Summary Introduction

To calculate: Percentage of payment represents principal and interest for the next 3 years.

Introduction:

Amortization:

Amotization means to write off or pay the debt over the priod of time it can be for a loan or intangible assets. Its puprpose is to get the cost recovery. Example of amortization is ,an automobile company that spent $20 million dollars on a design patent with a useful life of 20 years. The amortization value for that company will be $1 million each year.

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