Question

Susan takes a loan of $50,000 from Baroda bank. The rate of interest is 10% per annum. The first instalment will be paid at the end of year 5. Determine the amount of equal annual instalments if Mr. X wishes to repay the amount in five instalments

Answer 1

Present value=Cash flows*Present value of discounting factor(rate%,time period)

50,000=Cash flow for year 5/1.1^5+Cash flow for year 6/1.1^6+Cash flow for year 7/1.1^7+Cash flow for year 8/1.1^8+Cash flow for year 9/1.1^9

50,000=Annual Cash flow[1/1.1^5+1/1.1^6+1/1.1^7+1/1.1^8+1/1.1^9][Since cash flows are equal;hence cash flow for year 5=Cash flow for year 6 and so on]

50,000=Annual Cash flow*2.58915837

Annual cash flow=50,000/2.58915837

=$19311.29(Approx)