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Exhibit 4.18 Finding the present value of an annual ordinary annuity with various interest rates:
Excel example 11.
In this discussion on amortized loans, we will not cover any recent changes to the types of loans on
offer. We will focus on loans repaid in equal installments over the life of the loan, with portions of the
repayments applied toward the principal and interest, where the objective is to pay off the principal
amount of the loan. Amortize is derived from the Latin admortire, to kill, which for this exercise is the
result of paying off the loan. We will review the schedule and payment structures associated with
amortizing loans.
Exercise on Amortized Loans
We need to borrow money to purchase a new machine for our production line. We are borrowing the
entire cost of the machine, $200,000, for a period of 10 years, with an annual interest rate of 10%. To
determine our annual repayments, we will use the Excel “PMT” function (see Exhibit 4.19). The first
step is to determine what our annual payments will be; to do so we enter the known data:
• PV = -$200,000 (note the minus sign). This is the cost of the machine, $200,000, entered
into cell C4.
• I = 10%. This is the annual interest rate, entered into cell C5.
• N = 10. The length of the loan is 10 years, entered into cell C6.
Exhibit 4.19 Determine the annual payment schedule of a loan: Excel example 12.