Question

Mr. Joginder bought a building for ���60,000, payable on the following terms: a ���10,000 down payment and 25 equal annual installment payments to include principal and interest of 10 percent per annum. Calculate the amount of the installment payments. How much of the first year's payment goes toward reducing the principal amount?

Answer 1

The installment payments are $2,000 each. The first year's payment includes $3,000 that reduces the principal amount.

Step-by-step explanation:

To calculate the amount of the installment payments, we can subtract the down payment of $10,000 from the total cost of the building, which leaves us with $60,000 - $10,000 = $50,000. Next, we need to calculate the annual installment payment. Since there are 25 equal annual installment payments, we divide the remaining cost of the building by 25: $50,000 ÷ 25 = $2,000. Therefore, the amount of each installment payment is $2,000.

To determine how much of the first year's payment goes toward reducing the principal amount, we need to calculate the interest on the remaining cost of the building after the down payment. The remaining cost is $50,000. The interest on this amount at a rate of 10% per annum is $50,000 × 0.10 = $5,000. So, the portion of the first year's payment that goes toward reducing the principal amount is $2,000 - $5,000 = -$3,000.