Working Capital Financing^365
P = Rs 800,000 / 6,4177 = Rs 124,655.25.
After Central has made 10 annual payments of Rs 124,655,25, it will have fully repaid
the term loan and the bank will have been provided with its 9 per cent interest rate.
Table 4 shows how this annual payment is divided between interest and payment on
principal. At the time of loan, or at time O, the beginning balance is Rs 800,000. At
the end of the first year an annual payment of Rs 124,655.25 is made. This amount
includes interest of Rs 800,000 ◊ 0.09% = Rs 72,000. The remaining payment,
Rs 124,655.25 ñ Rs 72,000 = Rs 52,655.25 is applied to the beginning balance to pay off
a portion of the loan. The first-year ending balance is Rs 800,000 ñ Rs 52,655.25 =
Rs 747,344.75. The first-year ending balance becomes the second-year beginning
balance. Interest on this is computed at 9 per cent. The difference between the second-
year payment and interest is used to reduce the second-year beginning balance. This
process continues until the final payment is made at the end of the tenth year and the
loan is completely repaid.
Table 4: Term Loan Amortisation1 2 3 4=2◊0.09 5=3ñ4 6=2ñ5
End of Year Beginning Balance Annual Payment Interest at 9 % Loan Repayment Ending
Balance
0 Rs 800,000.00 Rs ñ Rs ñ Rs ñRs 800,000,00
1 800,000.00 124,655.25 72,000.00 52,655.25 747,344.75
2 747,344.75 124,655.25 67,261.03 57,394.22 689,950.53
3 689,950.53 124,655.25 62,095.55 62,559.70 627,390,83
4 627,390.83 124,655.25 56,465.17 38,190.08 559,200.75
5 559,200.75 124,655.25 50,328.07 74,327.18 484,873.57
6 484,873.57 124,655.25 43,638.62 81,016.63 403,856.94
7 403,856.94 124,655.25 36,347.12 88,308.13 315,548.81
8 315,548.81 124,655.25 28,399.39 96,255.86 219,292.95
9 219,292.95 124,655.25 19,736.37 104,918.88 114,374.07
10 114,374.07 124,655.25 10,281.18a 114,374.07 ó
a For the tenth year only, interest is the difference between annual payment balance. This rounding-off error
exists because only four decimals were utilised in the annuity factor used in computing the annual payment.
One word of caution related to Table 4 has to do with the rounding-off error. We used
a rounded-off annuity factor of 6.4177 from Appendix B. the actual annuity factor is
6.4176550. Rounding off the annuity factor changes the annual payment slightly. The
net cumulative result is that when one calculate the interest for the last year, it becomes
Rs 114,374.07 ◊ 0.09% = Rs 10,293.67. It should be recognised that minor errors are
caused by rounding-off annuity and discount factors. This error is remedied by either
using more significant decimals or by treating interest expense in the last year as a