Determine the original loan value loan amount for someone agreeing to make annual year end payments...
Determine the original loan value loan amount for someone agreeing to make annual year end payments of
$25,000/year for the next 20 years when the market rate is 4%. Note: you must use the pricing formula from class. Do not use 20 different terms.
Homework Answers
Annual loan payment = 25,000
Payment Time period = 20 years
Interest Rate = 4%
Calculate the original loan value.
Here we have to calculate the Present value of the future annual
payments.
PV = A (P/A, 4%, 20)
(P/A, I, N) factor is used to calculate the present value of
annual uniform cash flows.
PV = 25,000(P/A, 4%, 20)
PV = 25000(13.59033) = 339,758.25
The original loan is $339,758.25
The formula used in calculating P/A factor is = (1+interest) ^n - 1 / interest (1+interest)^n
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