Question

a. Mr. Kiwat borrowed GH¢200,000 from his bankers to buy his dream house. Repayment is over 4 years and first payment is due one year from hence. He will make equal payments to amortize both the principal and interest, which is calculated on a reducing balance basis. The bank will charge 5% above its current base rate of 20% per annum.

Required:

i. Calculate Mr Bruce’s annual payments

ii. Show a table on how the annual payment will liquidate the loan and interest.

b. Cross Ltd has bought an asset with a life span of 4 years. At the end of the 4 years, replacement of the asset will cost GH¢12,000. In this direction, the company has decided to provide for the future commitment by setting up a sinking fund account into which equal annual investment will be made at the end of each year. Interest rate on the investment will be 12% per annum.

Required:

i. Calculate the annual installments

ii. Draw up the sinking fund schedule to show the growth fund iii. Assuming the first payments will be made now and 12 months thereafter, what are the annual payments? iv. Draw up the sinking fund schedule under(c)

Answer 1

i) Mr. Bruce's effective interest rate would be (20+5)% or 25%

So, his effective annual payment would be=GH¢84,688.35. Calculation given below:

ii) Table for Liquidation of principal and interest:

b) When you are making payment at the end of the year you are actually making 3 payment to grow your capital to 12000 at the end of 4 year.

So, your annual installment would be=GH¢2510.81