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To whom it may concern,
Please help me answer the following question:A mortgage of $40000 is paid at a rate of $5000 at the end of each year. If interest is to be charged at 7%, how many years will it take to repay the mortgage?
It does sound pretty simple but I’ve failed to comprehend as to why I can’t wrap my head around it. Your help is much appreciated.
The best way of doing it is as follows:
The present value of the repayments will equal 40,000.
To get the present value, you multiply 5,000 by the annuity discount factor at 7% for the relevant number of years.
So……the annuity factor must be 40,000 / 5,000 = 8.000
So what you need to do is look at the tables for the annuity factors, go down the 7% column and find the annuity factor closest to 8.000.
Then you will know the number of years 🙂
(The other way is to use the formula that is given at the top of the annuity tables)
Wow sir I would have never thought of that. I honestly didn’t know that the $40000 itself was the Net Present value the whole time! Thank you so much sir!! Hats of to you 🙂
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