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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

AMORTIZATION SCHEDULE

  1. a. Set up an amortization schedule for a $25,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 10% 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.

Amortization:

Amotization means to write off or pay the debt over the priod of time, it can be for loan or intangible assets. Its purpose is to get cost recovery. Example of amortization is ,an automobile company 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

Solution:

Calculate annual installments of $25,000 to be paid equally for 3 years with 10% interest.

Formula to calculate annual payment is,

PVA=PMT×(1I1I(1+I)N)

Where,

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

Substitute $ 25,000 for PVA, 10% for I and 3 for N.

$25,000=PMT×(10

b.

Summary Introduction

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

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