Question

A mortgage requires you to pay $70,000 at the end of each of the next eight years. The interest rate is 8%. a. What is the present value of these payments? b.Calculate for each year the loan balance that remains outstanding, the interest payment on the loan, and the reduction in the loan balance.

Answer 1

Answer:

a. $402,264

b. Working for each year the loan balance that remains outstanding, the interest payment on the loan, and the reduction in the loan balance is made in an MS Excel file which attached with this answer. Please find it.

Explanation:

a.

Present value of these payments can be calcullated by following formula

P = r ( PV ) / 1 - ( 1 + r )^-n

P = payment per year = $70,000

r = rate per period = 8%

n = number years = 8 years

PV =  present value of all payments = ?

$70,000 = 8% x PV / 1 - ( 1 + 8% )^-8

$70,000 = 0.08 x PV / 1 - ( 1.08 )^-8

$70,000 = 0.08 x PV / 0.45973

$70,000 x 0.45973 = 0.08 x PV

$32,181 = 0.08 x PV

PV = $32,181 / 0.08

PV = 402,263.75

Download xlsx