Question

JOHN BORROWS $14000 FROM THE SAVINGS AND LOAN AT A COMPOUND INTEREST RATE OF 5%/YR. HE WILL PAY BACK THE LOAN IN EQUAL ANNUAL PAYMENTS OVER A 4- YEAR PERIOD. BERTHA BORROWS $10,000 FROM SETH, WHO IS JOHN'S BROTHER DETERMINE THE EQUAL ANNUAL PAYMENTS - SUMMARIZE JOHN'S FINANCIAL POSITION IN BULLET OUTLINE FORMAT BORROWS: $14000 BY SIGNING, I HAVE NOT GIVEN NOR RECEIVED HELP:

Answer 1

DETERMINATION OF EQUAL ANNUAL PAYMENTS

Equal annual payments = Principal ÷ Present value annuity factor (4 Years, 5%)

= 14,000/3.54595050416236

= $3948.16

.

Verification:

End of Year	Payment	Interest	Principal Repayment	Outstanding Balance
0	3948.16			14000
1	3948.16	700	3248.16	10751.84
2	3948.16	537.59	3410.57	7341.27
3	3948.16	367.06	3581.1	3760.17
4	3948.16	188	3760.16	0

(i) interest is calculated on Outstanding balance:

1st year interest = $14,000 x 5% = 700, 2nd year interest = 10751.84 x 5% = 537.59, 3rd year interest = 7341.27 x 5 % = 367.06 and 4th year interest = 3760.17 x 5% = 188

(ii) Principal repayment = Payment - Interest

(iii) Outstanding balance = Previous Year's Outstanding balance - Principal repayment

Year	Opening balance	Principal repayment	Outstanding Balance
1	14000	3248.16	10751.84
2	10751.84	3410.57	7341.27
3	7341.27	3581.1	3760.17
4	3760.17	3760.16	0

SUMMARIZE JOHN'S FINANCIAL POSITION IN BULLET OUTLINE FORMAT

- BORROWS: $14,000

- ASSETS (Cash): $14,000

Note:

1.Bertha borrows's from John's brother do not include in the financial statements of John.

2. The value of 'Present value annuity factor (4 Years, 5%)' taken from present value Table. you can also calculate as follows

Year	Calculation	Value
1	1/(1+0.05)1	0.952380952
2	1/(1+0.05)2	0.907029478
3	1/(1+0.05)3	0.863837599
4	1/(1+0.05)4	0.822702475
Annuity factor		3.545950504