Question

You are the finance manager of your company. Your company is planning for capacity expansion and need to borrow RM850,000 from a local bank. The offered term loan will be amortised in 9 years with a nominal interest rate of 7.2% p.a. compounded monthly. The final payment will be at the end of Year 9.

1.Based on your working on an amortisation table, how much principal and interest would have your company paid after the first four months of payments?

2.If you have a choice, would you prefer to repay the above loan monthly (assume7.2% per year is compounded monthly) or annually (assume 7.2% per year is compounded annually) based on the total interest incurred? What is the main factor that contribute to such a difference in interest?

Answer 1

Answer

A.

Option-1 (Repayment of loan monthly at the end of each month)

Monthly fixed payment will be calculated as follows by Annuity method-

PV of the monthly payment =

=>

=>

=> Monthly payment= 10716.64

Payment Every Month  10,716.64

Total of 108 Payments  1,157,397.52

Total Interest  307,397.52

	Beginning Balance	[email protected]% per month on opening balance	Principal payment	Total Payment (Interest +Principal)	Ending Balance
1	$850,000.00	$5,100.00	$5,616.64	$10716.64	$844,383.36
2	$844,383.36	$5,066.30	$5,650.34	$10716.64	$838,733.01
3	$838,733.01	$5,032.40	$5,684.25	$10716.64	$833,048.77
4	$833,048.77	$4,998.29	$5,718.35	$10716.64	$827,330.42
5	$827,330.42	$4,963.98	$5,752.66	$10716.64	$821,577.75
6	$821,577.75	$4,929.47	$5,787.18	$10716.64	$815,790.58
7	$815,790.58	$4,894.74	$5,821.90	$10716.64	$809,968.68
8	$809,968.68	$4,859.81	$5,856.83	$10716.64	$804,111.85
9	$804,111.85	$4,824.67	$5,891.97	$10716.64	$798,219.87
10	$798,219.87	$4,789.32	$5,927.32	$10716.64	$792,292.55
11	$792,292.55	$4,753.76	$5,962.89	$10716.64	$786,329.66
12	$786,329.66	$4,717.98	$5,998.67	$10716.64	$780,330.99
Year #1 End
13	$780,330.99	$4,681.99	$6,034.66	$10716.64	$774,296.34
14	$774,296.34	$4,645.78	$6,070.87	$10716.64	$768,225.47
15	$768,225.47	$4,609.35	$6,107.29	$10716.64	$762,118.18
16	$762,118.18	$4,572.71	$6,143.93	$10716.64	$755,974.25
17	$755,974.25	$4,535.85	$6,180.80	$10716.64	$749,793.45
18	$749,793.45	$4,498.76	$6,217.88	$10716.64	$743,575.56
19	$743,575.56	$4,461.45	$6,255.19	$10716.64	$737,320.37
20	$737,320.37	$4,423.92	$6,292.72	$10716.64	$731,027.65
21	$731,027.65	$4,386.17	$6,330.48	$10716.64	$724,697.18
22	$724,697.18	$4,348.18	$6,368.46	$10716.64	$718,328.71
23	$718,328.71	$4,309.97	$6,406.67	$10716.64	$711,922.04
24	$711,922.04	$4,271.53	$6,445.11	$10716.64	$705,476.93
Year #2 End
25	$705,476.93	$4,232.86	$6,483.78	$10716.64	$698,993.15
26	$698,993.15	$4,193.96	$6,522.68	$10716.64	$692,470.46
27	$692,470.46	$4,154.82	$6,561.82	$10716.64	$685,908.64
28	$685,908.64	$4,115.45	$6,601.19	$10716.64	$679,307.45
29	$679,307.45	$4,075.84	$6,640.80	$10716.64	$672,666.65
30	$672,666.65	$4,036.00	$6,680.64	$10716.64	$665,986.01
31	$665,986.01	$3,995.92	$6,720.73	$10716.64	$659,265.28
32	$659,265.28	$3,955.59	$6,761.05	$10716.64	$652,504.23
33	$652,504.23	$3,915.03	$6,801.62	$10716.64	$645,702.61
34	$645,702.61	$3,874.22	$6,842.43	$10716.64	$638,860.18
35	$638,860.18	$3,833.16	$6,883.48	$10716.64	$631,976.70
36	$631,976.70	$3,791.86	$6,924.78	$10716.64	$625,051.92
Year #3 End
37	$625,051.92	$3,750.31	$6,966.33	$10716.64	$618,085.59
38	$618,085.59	$3,708.51	$7,008.13	$10716.64	$611,077.46
39	$611,077.46	$3,666.46	$7,050.18	$10716.64	$604,027.28
40	$604,027.28	$3,624.16	$7,092.48	$10716.64	$596,934.80
41	$596,934.80	$3,581.61	$7,135.03	$10716.64	$589,799.76
42	$589,799.76	$3,538.80	$7,177.85	$10716.64	$582,621.92
43	$582,621.92	$3,495.73	$7,220.91	$10716.64	$575,401.00
44	$575,401.00	$3,452.41	$7,264.24	$10716.64	$568,136.77
45	$568,136.77	$3,408.82	$7,307.82	$10716.64	$560,828.94
46	$560,828.94	$3,364.97	$7,351.67	$10716.64	$553,477.27
47	$553,477.27	$3,320.86	$7,395.78	$10716.64	$546,081.49
48	$546,081.49	$3,276.49	$7,440.15	$10716.64	$538,641.34
Year #4 End
49	$538,641.34	$3,231.85	$7,484.80	$10716.64	$531,156.54
50	$531,156.54	$3,186.94	$7,529.70	$10716.64	$523,626.84
51	$523,626.84	$3,141.76	$7,574.88	$10716.64	$516,051.96
52	$516,051.96	$3,096.31	$7,620.33	$10716.64	$508,431.62
53	$508,431.62	$3,050.59	$7,666.05	$10716.64	$500,765.57
54	$500,765.57	$3,004.59	$7,712.05	$10716.64	$493,053.52
55	$493,053.52	$2,958.32	$7,758.32	$10716.64	$485,295.20
56	$485,295.20	$2,911.77	$7,804.87	$10716.64	$477,490.32
57	$477,490.32	$2,864.94	$7,851.70	$10716.64	$469,638.62
58	$469,638.62	$2,817.83	$7,898.81	$10716.64	$461,739.81
59	$461,739.81	$2,770.44	$7,946.20	$10716.64	$453,793.61
60	$453,793.61	$2,722.76	$7,993.88	$10716.64	$445,799.72
Year #5 End
61	$445,799.72	$2,674.80	$8,041.85	$10716.64	$437,757.88
62	$437,757.88	$2,626.55	$8,090.10	$10716.64	$429,667.78
63	$429,667.78	$2,578.01	$8,138.64	$10716.64	$421,529.15
64	$421,529.15	$2,529.17	$8,187.47	$10716.64	$413,341.68
65	$413,341.68	$2,480.05	$8,236.59	$10716.64	$405,105.08
66	$405,105.08	$2,430.63	$8,286.01	$10716.64	$396,819.07
67	$396,819.07	$2,380.91	$8,335.73	$10716.64	$388,483.34
68	$388,483.34	$2,330.90	$8,385.74	$10716.64	$380,097.60
69	$380,097.60	$2,280.59	$8,436.06	$10716.64	$371,661.54
70	$371,661.54	$2,229.97	$8,486.67	$10716.64	$363,174.86
71	$363,174.86	$2,179.05	$8,537.59	$10716.64	$354,637.27
72	$354,637.27	$2,127.82	$8,588.82	$10716.64	$346,048.45
Year #6 End
73	$346,048.45	$2,076.29	$8,640.35	$10716.64	$337,408.10
74	$337,408.10	$2,024.45	$8,692.20	$10716.64	$328,715.90
75	$328,715.90	$1,972.30	$8,744.35	$10716.64	$319,971.55
76	$319,971.55	$1,919.83	$8,796.81	$10716.64	$311,174.74
77	$311,174.74	$1,867.05	$8,849.60	$10716.64	$302,325.14
78	$302,325.14	$1,813.95	$8,902.69	$10716.64	$293,422.45
79	$293,422.45	$1,760.53	$8,956.11	$10716.64	$284,466.34
80	$284,466.34	$1,706.80	$9,009.85	$10716.64	$275,456.50
81	$275,456.50	$1,652.74	$9,063.90	$10716.64	$266,392.59
82	$266,392.59	$1,598.36	$9,118.29	$10716.64	$257,274.30
83	$257,274.30	$1,543.65	$9,173.00	$10716.64	$248,101.31
84	$248,101.31	$1,488.61	$9,228.04	$10716.64	$238,873.27
Year #7 End
85	$238,873.27	$1,433.24	$9,283.40	$10716.64	$229,589.87
86	$229,589.87	$1,377.54	$9,339.10	$10716.64	$220,250.76
87	$220,250.76	$1,321.50	$9,395.14	$10716.64	$210,855.62
88	$210,855.62	$1,265.13	$9,451.51	$10716.64	$201,404.11
89	$201,404.11	$1,208.42	$9,508.22	$10716.64	$191,895.89
90	$191,895.89	$1,151.38	$9,565.27	$10716.64	$182,330.62
91	$182,330.62	$1,093.98	$9,622.66	$10716.64	$172,707.96
92	$172,707.96	$1,036.25	$9,680.40	$10716.64	$163,027.57
93	$163,027.57	$978.17	$9,738.48	$10716.64	$153,289.09
94	$153,289.09	$919.73	$9,796.91	$10716.64	$143,492.18
95	$143,492.18	$860.95	$9,855.69	$10716.64	$133,636.49
96	$133,636.49	$801.82	$9,914.82	$10716.64	$123,721.67
Year #8 End
97	$123,721.67	$742.33	$9,974.31	$10716.64	$113,747.35
98	$113,747.35	$682.48	$10,034.16	$10716.64	$103,713.19
99	$103,713.19	$622.28	$10,094.36	$10716.64	$93,618.83
100	$93,618.83	$561.71	$10,154.93	$10716.64	$83,463.90
101	$83,463.90	$500.78	$10,215.86	$10716.64	$73,248.04
102	$73,248.04	$439.49	$10,277.16	$10716.64	$62,970.88
103	$62,970.88	$377.83	$10,338.82	$10716.64	$52,632.06
104	$52,632.06	$315.79	$10,400.85	$10716.64	$42,231.21
105	$42,231.21	$253.39	$10,463.26	$10716.64	$31,767.96
106	$31,767.96	$190.61	$10,526.04	$10716.64	$21,241.92
107	$21,241.92	$127.45	$10,589.19	$10716.64	$10,652.73
108	$10,652.73	$63.92	$10,652.73	$10716.64	$0.00

After First 4 month of payment-

Total interest payment - $20196.99

Total Principal Payment - $22669.58

	Beginning Balance	[email protected]% per month on opening balance	Principal payment	Total Payment (Interest +Principal)	Ending Balance
1	$850,000.00	$5,100.00	$5,616.64	$10716.64	$844,383.36
2	$844,383.36	$5,066.30	$5,650.34	$10716.64	$838,733.01
3	$838,733.01	$5,032.40	$5,684.25	$10716.64	$833,048.77
4	$833,048.77	$4,998.29	$5,718.35	$10716.64	$827,330.42
	Total	$20196.99	$22669.58	$42866.57

Option-2 (Repayment of loan Annually at the end of each year)

Monthly fixed payment will be calculated as follows by Annuity method-

PV of the Annual payment =

=>

=>

=> Annual payment= 131575.66

Payment Every Year  $131,575.66

Total of 9 Payments  $1,184,180.97

Total Interest  $334,180.97

	Beginning Balance	[email protected]% per annum on the beginning balance	Principal	Total (Interest + Principal)	Ending Balance
1	$850,000.00	$61,200.00	$70,375.66	$131,575.66	$779,624.34
2	$779,624.34	$56,132.95	$75,442.71	$131,575.66	$704,181.63
3	$704,181.63	$50,701.08	$80,874.59	$131,575.66	$623,307.04
4	$623,307.04	$44,878.11	$86,697.56	$131,575.66	$536,609.48
5	$536,609.48	$38,635.88	$92,939.78	$131,575.66	$443,669.71
6	$443,669.71	$31,944.22	$99,631.44	$131,575.66	$344,038.26
7	$344,038.26	$24,770.75	$106,804.91	$131,575.66	$237,233.35
8	$237,233.35	$17,080.80	$114,494.86	$131,575.66	$122,738.49
9	$122,738.49	$8,837.17	$122,738.49	$131,575.66	$0.00

Analysis of payments-

	Monthly payment	Annual payment
Total Payment	$ 1,157,397.52	$1184180.97
Total Interest	$307,397.52	$334180.97

Hence mothly payment is better as the total payment and interest is less.

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