present value (1 Viewer)

[47sniper]

Just a question, with the present value formula, when it says someone borrows a certain amount at a 'reducible interest rate', what does that mean for the formula? am i supposed to do something different from normal? in the excel book this is the question:

Janina borrows 25000 at a reducible interest rate of 16% and pays it off over a period of 15 years. find:
1) the amount of each yearly installment

in the book, the working out doesn't show any differences in the way they work out a normal interest rate... im confused
help?

 

[PC]

Janina borrows 25000 at a reducible interest rate of 16% and pays it off over a period of 15 years. find:
1) the amount of each yearly installment

"Reducible interest" just means that you are charged interest on what you still owe rather than the amount you borrowed in the first place. A bit like compound interest, only in reverse because you're not investing but borrowing.

So you're right, you just treat the 16% as a normal interest rate.

N = M x [ (1+r)ⁿ – 1 / r(1+r)ⁿ ]
25000 = M x [ (1+0.16)¹⁵ – 1 / 0.16(1+0.16)¹⁵ ]
25000 = M x [ (1.16)¹⁵ – 1 / 0.16(1.16)¹⁵ ]
25000 = M x 5.575456163
M = $4483.94

or, if you've got a graphic calculator

n = 15
I = 16
PV = -25000
PMT = ?
FV = 0
P/Y = 1
C/Y = 1
.: PMT = $4483.94

 

[47sniper]

hey thanks for the help, that question was killing me lol