Question

On January 1, 2016, Eagle borrows $25,000 cash by signing a four-year, 7% installment note. The note requires four equal total payments of accrued interest and principal on December 31 of each year from 2016 through 2019. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

1. Compute the amount of each of the four equal total payments.

2. Prepare an amortization table for this installment note. (Round all amounts to the nearest whole dollar.)

Answer 1

1. Let amount of each instalment be equal to x.

So, Instalment*Annuity Factor @ 7% for 4 years = Amount of loan taken

i.e. x*PVIFA(7%,4) = $25000

or, 3.38721 x = $25000

or, x = 25000/3.38721

= 7380.71 = $ 7381 (approx.)

2. Amortisation Table:

a	b	c	d	e	f
Year	Opening Principal Outstanding	Interest @ 7% (b*7%)	Installment	Principal Repayment (d-c)	Closing Principal (b-e)
1	25000	1750	7381	5631	19369
2	19369	1356	7381	6025	13344
3	13344	934	7381	6447	6897
4	6897	484 (balancing figure)	7381	6897	0

Note: The last principal payment is equal to the outstanding balance at the beginning to square off the position and so, the last interest component has been computed as a balancing figure.