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How did they work out fixed annual interest and principal payment
The interest is 3.57
But I didn’t understand how I calculate principal
Always, however any borrowing is repaid, the present value of the repayments (including interest) will equal the amount borrowed.
If the repayments (interest + capital) are of an equal amount each year, then the PV is the repayment x the annuity factor.
So the amount of the repayment each each year is equal to the amount of the borrowing / the annuity factor.
I have a similar question.
Let’s say loan a 5 year loan is 5,000 at interest of 5% and tax is 20
The tax shied is 5000 x 0.05 x 0.20
My question is shouldn’t this answer be be multiplied by 5 years before being discounted at a 5 year annuity? Since the interest saving occurs yearly? Please clarify Or my understanding is wrong
I don’t understand why this is similar – I am assuming you are referring here to APV calculations 🙂
The tax saving is 5000 x 0.05 x 0.20 = 50 per year.
We need the PV of the tax shield, and therefore there is a tax saving of 50 per year for 5 years – i.e. an annuity of 50 per year for 5 years.
To get the PV we multiply 50 by the 5 year annuity factor at either the risk free rate, or the yield to debt lenders (the examiner always accepts discounting at either rate, for the reasons I explain in my lectures).
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