Question

Ian loaned his friend $45,000 to start a new business. He considers this loan to be an investment, and therefore requires his friend to pay him an interest rate of 7% on the loan. He also expects his friend to pay back the loan over the next four years by making annual payments at the end of each year. Ian texted and asked that you help him calculate the annual payments that he should expect to receive so that he can recover his initial investment and earn the agreed upon 7% on his investment. Calculate the annual payment and complete the following capital recovery schedule: Beginning Amount $45,000.00 Interest Paid Principal Paid Year Payment Ending Balance - $0.02

Answer 1

Annual payment under Amortized loan = Amount of Loan/Present value Annuity factor
=45000/PVAF(7%, 4 years)
=45000/3.387211256
i.e.	13,285.27
Amotization Schedule
Year	Beginning Amount	Payment	Interest paid	Principal Paid	Ending Balance
1	45,000.00	13,285.27	3,150.00	10,135.27	34,864.73
2	34,864.73	13,285.27	2,440.53	10,844.74	24,019.99
3	24,019.99	13,285.27	1,681.40	11,603.87	12,416.12
4	12,416.12	13,285.27	869.13	12,416.14	(0.02)