Question

(Loan amortization) A firm borrows $20,000 from the bank at 11 percent compounded annually to purchase some new machinery. This loan is to be repaid in equal installments at the end of each year over the next 12 years. How much will each annual payment be?

The amount of each annual payment will be $ (Round to the nearest cent.)

Answer 1

The amount of payment is computed as follows:

Present value = Annual payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

$ 20,000 = Annual payment x [ (1 - 1 / (1 + 0.11)¹² ) / 0.11 ]

$ 20,000 = Annual payment x 6.492356149

Annual payment = $ 20,000 / 6.492356149

Annual payment = $ 3,080.55 Approximately