Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
AMORTIZATION SCHEDULE
- 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.
- 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.
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.
Calculate annual installments of $19,000 to be paid equally for 3 years with 8% interest.
Formula to calculate annual payment is,
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.
b
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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