Question

QUESTION ONE Mr. Joseph Hart runs a sole proprietorship business involved in construction of roads. He Inherited the business from his uncle several years ago. As part of his expansion plans, ne intends to get a Grader to be used in the business as the current practice of hiring one is proving costly for the business. He has been advised by his colleague that he should get a loan from a commercial bank for this purpose. The Grader he intends to purchase will cost K1,000,000.00 and he reckons to finance it 100% through this loan. The loan is to be paid in equal annual payments for a period of 5 years at an annual interest rate of 12 percent. He is concerned about meeting the annual payments from his business cash flows which fluctuate from time to time. He has asked you to draw up an amortization schedule showing the annual payments to be made on this loan, which he can use for cash flow purposes. (Ignore transaction fees, commissions and other upfront fees for accessing the loan) Total (20 marks)

Answer 1

Solution:

First of all we will be calculating the Payments that are to be made which can be easily done using our BA II plus calculator and entering the following inputs. PV = 1,000,000 , N=5 , I/Y=12 and FV =0 we need to find the PMT

On adding the respective inputs in the TVM row we get the PMT as : 277,409.7319

This is amount that we need to pay each year to retire the loan.

Amortization Schedule:

Amortization Schedule

Year	Principal	Interest Payment	Principal Payment	Ending Principal
1	1000,000	=1000,000 * 12% = 120,000	=277409.7319 - 120,000 = 157,409.7319	1000,000 - 157409.7319 =842,590.2681
2	842,590.2681	= 842,590.2681 *12% =101,110.8322	=277409.7319 - 101,110.8322 =176,298.8997	842,590.2681 - 176,298.8997 =666,291.3684
3	666,291.3684	= 666,291.3684*12% = 79954.9642	=277409.7319 - 79954.9642 = 197,454.7677	666,291.3684 - 197,454.7677 =468,836.6007
4	468,836.6007	468,836.6007 *12% =56,260.392	277409.7319 - 56,260.392 =221,149.3398	468,836.6007 - 221,149.3398 =247,687.2609
5	247,687.2609	247,687.2609 * 12% = 29,722.47131	277409.7319 - 29,722.47131 = 247687.2606	247,687.2609 - 247,687.2606 = .0003