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In the example (Annuity depreciation) of lecture of Divisional Performance part A (ROI and RI) the total debt amount of 750000 is divided by AF @10% to get each year amount.
To get the present value of any CF we actually multiply it. I don’t understand this calculation of $197837.If you are going to repay any loan or mortgage in equal instalments over a number of years, you can find the instalment amount by dividing the amount borrowed by the CF. So, lets say you borrow 10,000, to be repaid at 6% over two years. The amount to be paid at the end of each year is 10,000/1.8334 = 5,454 (1.8334 is the two year CF at 6%).
This can be proved by:
10,000 + 6% = amount owing at time 1 = 10,600.
After 5454 is paid, 5146 is owing during the second year.At the end of that year the amount owing is 5146 + 6% = 5454, just the amount of the second instalment.
Each 5146 repayment is a mix of interest and capital, but the relative amounts vary within each instalment.
Sir, In the example I agree with the amount owing at time 1 that is 10600. But after that 5454 is paid, how we come up with this amount (5454)?
Secondly in last line you said 5146 is mix of interest and capital. How is that?
According to me 5454 should be the amount which consist of interest and capital.As shown in the first paragraph, you come up with 5454 by dividing 10,000 by the 2 year factor. That is the standard way to work out the fixed instalments.
The last paragraph should say: “Each 5454 repayment is a mix of interest and capital, but the relative amounts vary within each instalment.” Sorry about the error.
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