Principles of Managerial Finance

CHAPTER 4 Time Value of Money 185

1892.82

6000 PV
N

CPT

PMT

I

4

10

Solution

Input Function

Calculator Use Using the calculator inputs shown at the left, you will find the

annual payment amount to be $1,892.82. Except for a slight rounding difference,

this value agrees with the table solution.

The allocation of each loan payment to interest and principal can be seen in

columns 3 and 4 of the loan amortization schedulein Table 4.8 at the top of page

186. The portion of each payment that represents interest (column 3) declines
     over the repayment period, and the portion going to principal repayment (col-
     umn 4) increases. This pattern is typical of amortized loans; as the principal is
     reduced, the interest component declines, leaving a larger portion of each subse-
     quent loan payment to repay principal.

Spreadsheet Use The annual payment to repay the loan also can be calculated

as shown on the first Excel spreadsheet. The amortization schedule allocating

each loan payment to interest and principal also can be calculated precisely as

shown on the second spreadsheet.