Answer:
Ian and His Friend's Business Loan
a. Annual payment = $5,904.56
b. Capital Recovery Schedule:
Year Beginning Payment Interest Principal Ending
Amount Paid Paid Balance
1 $20,000 $-5,904.56 $1,400 $4,504.56 $15,495.44
2 $15,495.44 $-5,904.56 $1,084.68 $4,819.88 $10,675.56
3. $10,675.56 $-5,904.56 $747.29 $5,157.27 $5,518.29
4. $5,518.29 $-5,904.56 $386.27 $5,518.29 $0
Explanation:
Ian's loan to his friend = $20,000
Interest rate = 7%
Payback period = 4 years
Repayment = annual at the end of each year.
Ian can retrieve $5,904.56 at the end of each period to reach the future value of $20,000.00 and total interest of $3,618.25.
Using an online financial calculator:
N (Number of Periods) 4.000
I/Y (Interest Rate) 7.000%
PMT (Periodic Payment) $-5,904.56
Starting Investment $20,000.00
Total Interest $3,618.25
