Question

Mr. Ram Lal is running a departmental store in Delhi and has 25 employees in his store. He is planning to open a new store in Sector 2 - Faridabad. Currently, he has already invested around 25 Lacs in his current departmental store and do not have much liquidity available to support the new store. For the same, he is planning to take a loan from a nationalised bank wherein the bank manager has provided few details about the loan. The loan amount which Mr. Ram Lal requires is Rs. 15,000,000. Bank is ready to provide the loan but at 12 percent interest rate per year and requires to be paid in 5 equal instalments payable at the end of each year. No, Mr. Ram Lal wants to calculate: a) What is the annual instalment payable at the end of each of the next 5 years? (5 marks) b) Prepare a loan amortization schedule for the 5-year loan period. (10 marks) c) What proportion of the instalment payable at the end of year 3, represents the principal repayment portion? (3 marks)

Answer 1

Mr. Ram Lal is planning to take a loan of Rs. 15,000,000 from a nationalised bank at 12% interest rate per year and requires paying it in 5 equal instalments payable at the end of each year. To calculate: (a) The annual instalment payable at the end of each of the next 5 yearsAnnual instalment payable can be calculated using the loan repayment formula, as follows:PMT = (P * r) / [1 - (1 + r)-n]Where,P = Rs. 15,000,000r = 12% per year, which is 1% per monthn = 5 years or 5 equal instalments per yearPMT = (15000000*0.01) / [1 - (1+0.01)^-5]PMT = 3639756.47 ≈ Rs. 3639756.5Annual instalment payable at the end of each of the next 5 years is Rs. 3639756.5 (approx). (b) A loan amortization schedule for the 5-year loan period.YearBeginning BalanceInstalmentInterestPrincipalEnding Balance120,000,0003,639,7561,800,0001,839,75618,160,244218,160,2443,639,7562,179,2141,460,54216,699,703316,699,7033,639,7561,988,7641,650,99215,048,711415,048,7113,639,7561,801,8241,837,93213,210,780513,210,7803,639,7561,614,8852,024,87111,185,909Loan amortization schedule for the 5-year loan period (c) The proportion of the instalment payable at the end of year 3 represents the principal repayment portionPrincipal repayment portion can be calculated as follows:Principal repayment portion = Instalment payable - Interest payable-[(Beginning balance of year 3 - Ending balance of year 3) + 1]Interest payable = Beginning balance of year 3 * r= 15148730.43 * 0.01= Rs. 151487.3(instalment payable = Rs. 3639756.5)Principal repayment portion = 3639756.5 - 151487.3 - [(18028629.56 - 15048710.45) + 1]= Rs. 1831949.75(instalment payable at the end of year 3 = Rs. 3639756.5)Proportion of the instalment payable at the end of year 3, represents the principal repayment portion = 1831949.75 / 3639756.5= 0.5033 ≈ 50.33%Therefore, the proportion of the instalment payable at the end of year 3 that represents the principal repayment portion is 50.33%.