Question

If you borrow $7,000 with an interest rate of 3 percent, to be repaid in five equal yearly payments at the end of the next five years, what would be the amount of each payment? Use Exhibit 1-D. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)

Amount of each paymet

Answer 1

Amount of each payment is $1528.48
Calculation of Annual Installment
Equated annual installment =			1 Divided BY (present value of annuity factor for 5 year at 3%)
i.e.			1 / present value of annuity factor for 5 year at 3%
Calculation of present value of annuity factor for 5 year at 3%
Annuity factor is the total of present value factor for 5 years at 3%
Year		Present value factor @ 3%
1		0.971
2		0.943
3		0.915
4		0.888
5		0.863
Total		4.580
Equated annual installment = $ 7,000/4.580
		= $1528.48
loan repayment schedule
Year	Opening balance of loan	Interest	Total loan	Installment	Balance of loan at the end of the year
1	$    7,000.00	$    210.00	$    7,210.00	$    1,528.48	$    5,681.52
2	$    5,681.52	$    170.45	$    5,851.96	$    1,528.48	$    4,323.48
3	$    4,323.48	$    129.70	$    4,453.19	$    1,528.48	$    2,924.70
4	$    2,924.70	$      87.74	$    3,012.45	$    1,528.48	$    1,483.96
5	$    1,483.96	$      44.52	$    1,528.48	$    1,528.48	$                 -
Notes
Interest is calculated by charging interest at 3% on opening balance of loan each year
Interest for the year 5 is taken as balance of loan installment and opening balance of loan of year 5 (i.e. $ 1,528.482 - 1483.963). This is done so that balance of loan at the end of 5th is Nil.