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A firm borrows $5000 and the loan is to be repaid in 4 equal payments at...

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Finance

A firm borrows $5000 and the loan is to be repaid in 4 equalpayments at the end of each of the next 4 years so that the endingbalance at the end of year 4 is 0. The interest rate on the loan is10 percent. The beginning balance in year 2 is:

Answer & Explanation Solved by verified expert
4.3 Ratings (705 Votes)

Step-1:Calculation of annual payment
Annual payment = Loan amount / Present value of annuity of 1
= $       5,000 / 3.1698654
= $ 1,577.35
Working:
Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.10)^-4)/0.10 i 10%
= 3.1698654 n 4
Step-2:Calculation of loan amortization schedule
Year Beginning balance Interest Expense Annual payment Reduction in principal Ending Balance
a b=a*10% c d=c-b e=a-d
1 $ 5,000.00 $     500.00 $ 1,577.35 $ 1,077.35 $ 3,922.65
2 $ 3,922.65 $     392.26 $ 1,577.35 $ 1,185.09 $ 2,737.56
3 $ 2,737.56 $     273.76 $ 1,577.35 $ 1,303.60 $ 1,433.96
4 $ 1,433.96 $     143.40 $ 1,577.35 $ 1,433.96 $         0.00
So, the beginning balance in year 2 is $ 3,922.65

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Transcribed Image Text

A firm borrows $5000 and the loan is to be repaid in 4 equalpayments at the end of each of the next 4 years so that the endingbalance at the end of year 4 is 0. The interest rate on the loan is10 percent. The beginning balance in year 2 is:

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