Suppose a business borrows $1,000,000 from a bank. The annual interest rate is 7.5 percent and the loan is for four years. The bank wants the business to make equal payments at the end of each year such that the principal of the loan is completely amortized (paid off) by the end of the fourth year. Determine the amount of annual payment required under the terms of the loan. You may find the following form helpful:
|
Year |
Loan Balance at Start of Year |
Interest at 7.5% |
Principal Payment |
Total Payment to Bank |
Loan Balance at End of Year |
|
1 |
$100,000.00 |
$75,000.00 |
|
|
|
|
2 |
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3 |
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|
4 |
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|
$0.00 |