Week 7 Solving for Loan Payments

Week 7: Lecture

Solving for Loan Payments

Suppose you were faced with the following situation:

Joe’s Dockyard has obtained a $24,000 12% amortizing loan to finance the purchase of a new boat. What are the payments for this loan if the loan is to be paid off in ten annual payments?

The cash flows on a timeline:

tvm_loan_payments_24000_amort_12per.jpg

Again we turn to the annuity formula to solve the problem:

 

tvm_pvifa_24000_example.jpg

 

  1. Turn to Table A.4 in Appendix A in the back of your McGraw-Hill Create text, and look down the left side until you find the 10 year row
  2. Look out in the table until you come to the 12% column. Note the PVIFA factor there: 5.650. Insert this value into the PVA equation:

     

    24,000 = PMT (5.650)

    Now solve for PMT:

    24,000 / 5.650 = PMT

    4,247.78 = PMT

Note: Actually the payment is $4,247.62. There is a slight amount of rounding with the PVIFA factors in the Table.