Question

Suppose you were offered the opportunity to receive $2,500 beginning in one year
and continuing forever. If you could earn 12% on your investments, how much
should you pay for this perpetuity? [2]

(c) Prepare a loan amortization schedule involving a $850,000 loan at 10% over
4 years.

Answer 1

1

PV = cash flow/interest rate = 2500/0.12=20833.33

2

		Annual rate(M)=	yearly rate/1=	10.00%	Annual payment=	268150.18
	Year	Beginning balance (A)	Annual payment	Interest = M*A	Principal paid	Ending balance
	1	850000.00	268150.18	85000.00	183150.18	666849.82
	2	666849.82	268150.18	66684.98	201465.20	465384.62
	3	465384.62	268150.18	46538.46	221611.72	243772.89
1	4	243772.89	268150.18	24377.29	243772.89	0.00

Where

Interest paid = Beginning balance * Annual interest rate

Principal = Annual payment – interest paid

Ending balance = beginning balance – principal paid

Beginning balance = previous Year ending balance