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Hi sir,
Good day.
Regarding this question from dec 05.
The 9% loan for 300000 is payable as equal payments for 6 years.
In the answer they have divided the total loan amount with the annutiy factor for 4 years @ 9%
ie, 300000/4.486
I dnt get the idea behind it. Y divide with the annuity factor?
Always, however the principal is repaid and however the interest is paid, the present value of the repayments and interest when discounted at the rate of interest will equal the amount of the loan.
(Think about it – the only reason we end up paying more than we borrowed is because of the interest, so if we discount at that interest rate it accounts for the interest and will always be the amount borrowed.)
Here, the repayments are an equal amount each year (and include both principal and interest). To get the PV you would therefore multiply by the 6 year annuity factor. Since the PV is the amount borrowed, the payments must be the amount borrowed divided by the annuity factor.
(The answer has correctly used the 6 year annuity factor. I assume when you wrote 4 years it was just a typing mistake 🙂 )
Thank you so much sir
Ya 4 was a typing mistake 🙂
So the outline is that for equal anual payments we divide by annuity factor and for equal annual reciepts we multiply by the annuity factor. Yes?
No. If you know the PV and want the equal annual amount, then you divide by the annuity factor.
If you know the equal annual amount and want to know the PV, then you multiply by the annuity factor.
It is the same whether looking at receipts or payments.
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