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# Math 1300: Section 3-4 Present Value of an Ordinary Annuity; Amortization

Lecture on Section 3-4 of Barnett's "Finite Mathemaitcs."

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### Math 1300: Section 3-4 Present Value of an Ordinary Annuity; Amortization

1. 1. Present Value of an Ordinary Annuity Amortization Amortization Schedules Math 1300 Finite MathematicsSection 3.4 Present Value of an Annuity; Amortization Jason Aubrey Department of Mathematics University of Missouri university-logo Jason Aubrey Math 1300 Finite Mathematics
2. 2. Present Value of an Ordinary Annuity Amortization Amortization SchedulesPresent Value Present value is the value on a given date of a future payment or series of future payments, discounted to reﬂect the time value of money and other factors such as investment risk. university-logo Jason Aubrey Math 1300 Finite Mathematics
3. 3. Present Value of an Ordinary Annuity Amortization Amortization SchedulesPresent Value Present value is the value on a given date of a future payment or series of future payments, discounted to reﬂect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash ﬂows at different times on a meaningful "like to like" basis. university-logo Jason Aubrey Math 1300 Finite Mathematics
4. 4. Present Value of an Ordinary Annuity Amortization Amortization SchedulesTheorem (The present value of an ordinary annuity) 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
5. 5. Present Value of an Ordinary Annuity Amortization Amortization SchedulesTheorem (The present value of an ordinary annuity) 1 − (1 + i)−n PV = PMT iwhere PV = present value of all payments university-logo Jason Aubrey Math 1300 Finite Mathematics
6. 6. Present Value of an Ordinary Annuity Amortization Amortization SchedulesTheorem (The present value of an ordinary annuity) 1 − (1 + i)−n PV = PMT iwhere PV = present value of all payments PMT = periodic payment university-logo Jason Aubrey Math 1300 Finite Mathematics
7. 7. Present Value of an Ordinary Annuity Amortization Amortization SchedulesTheorem (The present value of an ordinary annuity) 1 − (1 + i)−n PV = PMT iwhere PV = present value of all payments PMT = periodic payment i = rate per period university-logo Jason Aubrey Math 1300 Finite Mathematics
8. 8. Present Value of an Ordinary Annuity Amortization Amortization SchedulesTheorem (The present value of an ordinary annuity) 1 − (1 + i)−n PV = PMT iwhere PV = present value of all payments PMT = periodic payment i = rate per period n = number of periods university-logo Jason Aubrey Math 1300 Finite Mathematics
9. 9. Present Value of an Ordinary Annuity Amortization Amortization SchedulesTheorem (The present value of an ordinary annuity) 1 − (1 + i)−n PV = PMT iwhere PV = present value of all payments PMT = periodic payment i = rate per period n = number of periodsNote: Payments are made at the end of each period. university-logo Jason Aubrey Math 1300 Finite Mathematics
10. 10. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: American General offers a 10-year ordinary annuitywith a guaranteed rate of 6.65% compounded annually. Howmuch should you pay for one of these annuities if you want toreceive payments of \$5,000 annually over the 10-year period? university-logo Jason Aubrey Math 1300 Finite Mathematics
11. 11. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: American General offers a 10-year ordinary annuitywith a guaranteed rate of 6.65% compounded annually. Howmuch should you pay for one of these annuities if you want toreceive payments of \$5,000 annually over the 10-year period? r 0.0665Here m = 1; n = 10; i = m = 1 = 0.0665; PMT = \$5, 000.So, university-logo Jason Aubrey Math 1300 Finite Mathematics
12. 12. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: American General offers a 10-year ordinary annuitywith a guaranteed rate of 6.65% compounded annually. Howmuch should you pay for one of these annuities if you want toreceive payments of \$5,000 annually over the 10-year period? r 0.0665Here m = 1; n = 10; i = m = 1 = 0.0665; PMT = \$5, 000.So, 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
13. 13. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: American General offers a 10-year ordinary annuitywith a guaranteed rate of 6.65% compounded annually. Howmuch should you pay for one of these annuities if you want toreceive payments of \$5,000 annually over the 10-year period? r 0.0665Here m = 1; n = 10; i = m = 1 = 0.0665; PMT = \$5, 000.So, 1 − (1 + i)−n PV = PMT i 1 − (1.0665)−10 PV = (\$5, 000) = \$35, 693.18 .0665 university-logo Jason Aubrey Math 1300 Finite Mathematics
14. 14. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: Recently, Lincoln Beneﬁt Life offered an ordinaryannuity that earned 6.5% compounded annually. A personplans to make equal annual deposits into this account for 25years in order to then make 20 equal annual withdrawals of\$25,000, reducing the balance in the account to zero. Howmuch must be deposited annually to accumlate sufﬁcient fundsto provide for these payments? How much total interest isearned during this entire 45-year process? university-logo Jason Aubrey Math 1300 Finite Mathematics
15. 15. Present Value of an Ordinary Annuity Amortization Amortization SchedulesWe ﬁrst ﬁnd the present value necessary to provide for thewithdrawals. university-logo Jason Aubrey Math 1300 Finite Mathematics
16. 16. Present Value of an Ordinary Annuity Amortization Amortization SchedulesWe ﬁrst ﬁnd the present value necessary to provide for thewithdrawals.In this calculation, PMT = \$25,000, i = 0.065 and n = 20. university-logo Jason Aubrey Math 1300 Finite Mathematics
17. 17. Present Value of an Ordinary Annuity Amortization Amortization SchedulesWe ﬁrst ﬁnd the present value necessary to provide for thewithdrawals.In this calculation, PMT = \$25,000, i = 0.065 and n = 20. 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
18. 18. Present Value of an Ordinary Annuity Amortization Amortization SchedulesWe ﬁrst ﬁnd the present value necessary to provide for thewithdrawals.In this calculation, PMT = \$25,000, i = 0.065 and n = 20. 1 − (1 + i)−n PV = PMT i 1 − (1.065)−20 PV = (\$25, 000) = \$275, 462.68 .065 university-logo Jason Aubrey Math 1300 Finite Mathematics
19. 19. Present Value of an Ordinary Annuity Amortization Amortization SchedulesNow we ﬁnd the deposits that will produce a future value of\$275,462.68 in 25 years. university-logo Jason Aubrey Math 1300 Finite Mathematics
20. 20. Present Value of an Ordinary Annuity Amortization Amortization SchedulesNow we ﬁnd the deposits that will produce a future value of\$275,462.68 in 25 years.Here we use FV = \$275,462.68, i = 0.065 and n = 25. university-logo Jason Aubrey Math 1300 Finite Mathematics
21. 21. Present Value of an Ordinary Annuity Amortization Amortization SchedulesNow we ﬁnd the deposits that will produce a future value of\$275,462.68 in 25 years.Here we use FV = \$275,462.68, i = 0.065 and n = 25. (1 + i)n − 1 FV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
22. 22. Present Value of an Ordinary Annuity Amortization Amortization SchedulesNow we ﬁnd the deposits that will produce a future value of\$275,462.68 in 25 years.Here we use FV = \$275,462.68, i = 0.065 and n = 25. (1 + i)n − 1 FV = PMT i (1.065)25 − 1 \$275, 462.68 = PMT .065 university-logo Jason Aubrey Math 1300 Finite Mathematics
23. 23. Present Value of an Ordinary Annuity Amortization Amortization SchedulesNow we ﬁnd the deposits that will produce a future value of\$275,462.68 in 25 years.Here we use FV = \$275,462.68, i = 0.065 and n = 25. (1 + i)n − 1 FV = PMT i (1.065)25 − 1 \$275, 462.68 = PMT .065 .065 PMT = (\$275, 462.68) = \$4, 677.76 (1.065)25 − 1Thus, depositing \$4,677.76 annually for 25 years will providefor 20 annual withdrawals of \$25,000. university-logo Jason Aubrey Math 1300 Finite Mathematics
24. 24. Present Value of an Ordinary Annuity Amortization Amortization SchedulesThe interest earned during the entire 45-year process is university-logo Jason Aubrey Math 1300 Finite Mathematics
25. 25. Present Value of an Ordinary Annuity Amortization Amortization SchedulesThe interest earned during the entire 45-year process is interest = (total withdrawals) − (total deposits) university-logo Jason Aubrey Math 1300 Finite Mathematics
26. 26. Present Value of an Ordinary Annuity Amortization Amortization SchedulesThe interest earned during the entire 45-year process is interest = (total withdrawals) − (total deposits) = 20(\$25, 000) − 25(\$4, 677.76) university-logo Jason Aubrey Math 1300 Finite Mathematics
27. 27. Present Value of an Ordinary Annuity Amortization Amortization SchedulesThe interest earned during the entire 45-year process is interest = (total withdrawals) − (total deposits) = 20(\$25, 000) − 25(\$4, 677.76) = \$383, 056 university-logo Jason Aubrey Math 1300 Finite Mathematics
28. 28. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization In business, amortization is the distribution of a single lump-sum cash ﬂow into many smaller cash ﬂow installments, as determined by an amortization schedule. university-logo Jason Aubrey Math 1300 Finite Mathematics
29. 29. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization In business, amortization is the distribution of a single lump-sum cash ﬂow into many smaller cash ﬂow installments, as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both principal and interest. Amortization is chieﬂy used in loan repayments (a common example being a mortgage loan) and in sinking funds. university-logo Jason Aubrey Math 1300 Finite Mathematics
30. 30. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model. university-logo Jason Aubrey Math 1300 Finite Mathematics
31. 31. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end. university-logo Jason Aubrey Math 1300 Finite Mathematics
32. 32. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: A family has a \$50,000, 20-year mortgage at 7.2%compounded monthly. Find the monthly payment. university-logo Jason Aubrey Math 1300 Finite Mathematics
33. 33. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: A family has a \$50,000, 20-year mortgage at 7.2%compounded monthly. Find the monthly payment. 0.072We note that m = 12; i = 12 = 0.006; n = 20 × 12 = 240;PV = \$50, 000 university-logo Jason Aubrey Math 1300 Finite Mathematics
34. 34. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: A family has a \$50,000, 20-year mortgage at 7.2%compounded monthly. Find the monthly payment. 0.072We note that m = 12; i = 12 = 0.006; n = 20 × 12 = 240;PV = \$50, 000 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
35. 35. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: A family has a \$50,000, 20-year mortgage at 7.2%compounded monthly. Find the monthly payment. 0.072We note that m = 12; i = 12 = 0.006; n = 20 × 12 = 240;PV = \$50, 000 1 − (1 + i)−n PV = PMT i 1 − (1.006)−240 \$50, 000 = PMT .006 university-logo Jason Aubrey Math 1300 Finite Mathematics
36. 36. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: A family has a \$50,000, 20-year mortgage at 7.2%compounded monthly. Find the monthly payment. 0.072We note that m = 12; i = 12 = 0.006; n = 20 × 12 = 240;PV = \$50, 000 1 − (1 + i)−n PV = PMT i 1 − (1.006)−240 \$50, 000 = PMT .006 .006 PMT = (\$50, 000) = \$393.67 1 − (1.006)−240 university-logo Jason Aubrey Math 1300 Finite Mathematics
37. 37. Present Value of an Ordinary Annuity Amortization Amortization SchedulesFor the same mortgage, ﬁnd the unpaid balance after 5 years. university-logo Jason Aubrey Math 1300 Finite Mathematics
38. 38. Present Value of an Ordinary Annuity Amortization Amortization SchedulesFor the same mortgage, ﬁnd the unpaid balance after 5 years. We use the value of PMT=\$393.67 to ﬁnd the unpaid balance after 5 years. In these "unpaid balance after" problems, n represents the number of interest periods remaining.Here n = 240 − 60 = 180. Therefore, university-logo Jason Aubrey Math 1300 Finite Mathematics
39. 39. Present Value of an Ordinary Annuity Amortization Amortization SchedulesFor the same mortgage, ﬁnd the unpaid balance after 5 years. We use the value of PMT=\$393.67 to ﬁnd the unpaid balance after 5 years. In these "unpaid balance after" problems, n represents the number of interest periods remaining.Here n = 240 − 60 = 180. Therefore, 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
40. 40. Present Value of an Ordinary Annuity Amortization Amortization SchedulesFor the same mortgage, ﬁnd the unpaid balance after 5 years. We use the value of PMT=\$393.67 to ﬁnd the unpaid balance after 5 years. In these "unpaid balance after" problems, n represents the number of interest periods remaining.Here n = 240 − 60 = 180. Therefore, 1 − (1 + i)−n PV = PMT i 1 − (1.006)−180 PV = (393.67) = \$43, 258.22 .006 university-logo Jason Aubrey Math 1300 Finite Mathematics
41. 41. Present Value of an Ordinary Annuity Amortization Amortization SchedulesFor the same mortgage, compute the unpaid balance after 10years. university-logo Jason Aubrey Math 1300 Finite Mathematics
42. 42. Present Value of an Ordinary Annuity Amortization Amortization SchedulesFor the same mortgage, compute the unpaid balance after 10years.Here n = 240 − 120 = 120 and so, university-logo Jason Aubrey Math 1300 Finite Mathematics
43. 43. Present Value of an Ordinary Annuity Amortization Amortization SchedulesFor the same mortgage, compute the unpaid balance after 10years.Here n = 240 − 120 = 120 and so, 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
44. 44. Present Value of an Ordinary Annuity Amortization Amortization SchedulesFor the same mortgage, compute the unpaid balance after 10years.Here n = 240 − 120 = 120 and so, 1 − (1 + i)−n PV = PMT i 1 − (1.006)−120 PV = (\$393.67) = \$33, 606.26 .006 university-logo Jason Aubrey Math 1300 Finite Mathematics
45. 45. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Example: Construct the amortization schedule for a \$5,000 debt that is to be amortized in eight equal quarterly payments at 2.8% compounded quarterly. university-logo Jason Aubrey Math 1300 Finite Mathematics
46. 46. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Example: Construct the amortization schedule for a \$5,000 debt that is to be amortized in eight equal quarterly payments at 2.8% compounded quarterly. First we calculate the quarterly payment. Here we have m = 4; n = 8; i = m = 0.028 = 0.007. Then r 4 university-logo Jason Aubrey Math 1300 Finite Mathematics
47. 47. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Example: Construct the amortization schedule for a \$5,000 debt that is to be amortized in eight equal quarterly payments at 2.8% compounded quarterly. First we calculate the quarterly payment. Here we have m = 4; n = 8; i = m = 0.028 = 0.007. Then r 4 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
48. 48. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Example: Construct the amortization schedule for a \$5,000 debt that is to be amortized in eight equal quarterly payments at 2.8% compounded quarterly. First we calculate the quarterly payment. Here we have m = 4; n = 8; i = m = 0.028 = 0.007. Then r 4 1 − (1 + i)−n PV = PMT i 1 − (1.007)−8 \$5, 000 = PMT .007 university-logo Jason Aubrey Math 1300 Finite Mathematics
49. 49. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Example: Construct the amortization schedule for a \$5,000 debt that is to be amortized in eight equal quarterly payments at 2.8% compounded quarterly. First we calculate the quarterly payment. Here we have m = 4; n = 8; i = m = 0.028 = 0.007. Then r 4 1 − (1 + i)−n PV = PMT i 1 − (1.007)−8 \$5, 000 = PMT .007 .007 PMT = (\$5, 000) = \$644.85 1 − (1.007)−8 university-logo Jason Aubrey Math 1300 Finite Mathematics
50. 50. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 1 2 3 4 5 6 7 8 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
51. 51. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 2 3 4 5 6 7 8 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
52. 52. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 2 \$644.85 3 \$644.85 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
53. 53. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 2 \$644.85 3 \$644.85 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
54. 54. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 2 \$644.85 3 \$644.85 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
55. 55. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 3 \$644.85 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
56. 56. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 3 \$644.85 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
57. 57. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 3 \$644.85 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
58. 58. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
59. 59. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
60. 60. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
61. 61. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
62. 62. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
63. 63. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
64. 64. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
65. 65. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
66. 66. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
67. 67. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
68. 68. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 \$13.35 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
69. 69. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 \$13.35 \$631.50 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
70. 70. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 \$13.35 \$631.50 \$1,276.26 7 \$644.85 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
71. 71. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 \$13.35 \$631.50 \$1,276.26 7 \$644.85 \$8.93 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
72. 72. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 \$13.35 \$631.50 \$1,276.26 7 \$644.85 \$8.93 \$635.50 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
73. 73. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 \$13.35 \$631.50 \$1,276.26 7 \$644.85 \$8.93 \$635.50 \$640.35 8 \$644.85 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
74. 74. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 \$13.35 \$631.50 \$1,276.26 7 \$644.85 \$8.93 \$635.50 \$640.35 8 \$644.85 \$4.48 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
75. 75. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 \$13.35 \$631.50 \$1,276.26 7 \$644.85 \$8.93 \$635.50 \$640.35 8 \$644.85 \$4.48 \$640.37 Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
76. 76. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAmortization Schedules Period Payment Payment Int. Bal. Reduction Unpaid Bal. 0 \$5,000 1 \$644.85 \$35 \$609.85 \$4,390.15 2 \$644.85 \$30.73 \$614.12 \$3,776.03 3 \$644.85 \$26.43 \$618.42 \$3,157.61 4 \$644.85 \$22.10 \$622.75 \$2,534.87 5 \$644.85 \$17.74 \$627.11 \$1,907.76 6 \$644.85 \$13.35 \$631.50 \$1,276.26 7 \$644.85 \$8.93 \$635.50 \$640.35 8 \$644.85 \$4.48 \$640.37 \$0.00* Interest owed during a period = university-logo (Balance during period)(Interest rate per period) Jason Aubrey Math 1300 Finite Mathematics
77. 77. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: A family purchased a home 10 years ago for\$80,000. The home was ﬁnanced by paying 20% down andsigning a 30-year mortgage at 9% on the unpaid balance. Thenet market value of the house (amount recieved aftersubtracting all costs involved in selling the house) is now\$120,000, and the family wishes to sell the house. How muchequity (to the nearest dollar) does the family have in the housenow after making 120 monthly payments?[Equity = (current net market value) - (unpaid loan balance)] university-logo Jason Aubrey Math 1300 Finite Mathematics
78. 78. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1. Find the monthly payment: university-logo Jason Aubrey Math 1300 Finite Mathematics
79. 79. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1. Find the monthly payment: r 0.09Here PV = (0.80)(\$80,000) = \$64,000, i = m = 12 = 0.0075and n = 360. university-logo Jason Aubrey Math 1300 Finite Mathematics
80. 80. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1. Find the monthly payment: r 0.09Here PV = (0.80)(\$80,000) = \$64,000, i = m = 12 = 0.0075and n = 360. 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
81. 81. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1. Find the monthly payment: r 0.09Here PV = (0.80)(\$80,000) = \$64,000, i = m = 12 = 0.0075and n = 360. 1 − (1 + i)−n PV = PMT i 1 − (1.0075)−360 \$64, 000 = PMT .0075 university-logo Jason Aubrey Math 1300 Finite Mathematics
82. 82. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1. Find the monthly payment: r 0.09Here PV = (0.80)(\$80,000) = \$64,000, i = m = 12 = 0.0075and n = 360. 1 − (1 + i)−n PV = PMT i 1 − (1.0075)−360 \$64, 000 = PMT .0075 .0075 PMT = (\$64, 000) = \$514.96 1 − (1.0075)−360 university-logo Jason Aubrey Math 1300 Finite Mathematics
83. 83. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 2. Find unpaid balance after 10 years (the PV of a\$514.96 per month, 20-year annuity): university-logo Jason Aubrey Math 1300 Finite Mathematics
84. 84. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 2. Find unpaid balance after 10 years (the PV of a\$514.96 per month, 20-year annuity): 0.09Here PMT = \$514.96, n = 12(20) = 240, i = 12 = 0.0075. university-logo Jason Aubrey Math 1300 Finite Mathematics
85. 85. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 2. Find unpaid balance after 10 years (the PV of a\$514.96 per month, 20-year annuity): 0.09Here PMT = \$514.96, n = 12(20) = 240, i = 12 = 0.0075. 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
86. 86. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 2. Find unpaid balance after 10 years (the PV of a\$514.96 per month, 20-year annuity): 0.09Here PMT = \$514.96, n = 12(20) = 240, i = 12 = 0.0075. 1 − (1 + i)−n PV = PMT i 1 − (1.0075)−240 PV = (\$514.96) = \$57, 235 .0075 university-logo Jason Aubrey Math 1300 Finite Mathematics
87. 87. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 3. Find the equity: university-logo Jason Aubrey Math 1300 Finite Mathematics
88. 88. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 3. Find the equity: Equity = (current net market value) − (unpaid loan balance) = \$120, 000 − \$57, 235 university-logo Jason Aubrey Math 1300 Finite Mathematics
89. 89. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 3. Find the equity: Equity = (current net market value) − (unpaid loan balance) = \$120, 000 − \$57, 235 = \$62, 765 university-logo Jason Aubrey Math 1300 Finite Mathematics
90. 90. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 3. Find the equity: Equity = (current net market value) − (unpaid loan balance) = \$120, 000 − \$57, 235 = \$62, 765Thus, if the family sells the house for \$120,000 net, the familywill have \$62,765 after paying off the unpaid loan balance of\$57,235. university-logo Jason Aubrey Math 1300 Finite Mathematics
91. 91. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: A person purchased a house 10 years ago for\$120,000 by paying 20% down and signing a 30-year mortgageat 10.2% compounded monthly. Interest rates have droppedand the owner wants to reﬁnance the unpaid balance bysigning a new 20-year mortgage at 7.5% compounded monthly.How much interest will the reﬁnancing save? university-logo Jason Aubrey Math 1300 Finite Mathematics
92. 92. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1: Find monthly payments. university-logo Jason Aubrey Math 1300 Finite Mathematics
93. 93. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1: Find monthly payments. The owner put 20% down at the time of purchase. Therefore, PV = \$120, 000 − (0.2)(\$120, 000) = \$96, 000. university-logo Jason Aubrey Math 1300 Finite Mathematics
94. 94. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1: Find monthly payments. The owner put 20% down at the time of purchase. Therefore, PV = \$120, 000 − (0.2)(\$120, 000) = \$96, 000. We also have that r 0.102 m = 12; n = 30 × 12 = 360; i = m = 12 = 0.0085. university-logo Jason Aubrey Math 1300 Finite Mathematics
95. 95. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1: Find monthly payments. The owner put 20% down at the time of purchase. Therefore, PV = \$120, 000 − (0.2)(\$120, 000) = \$96, 000. We also have that r 0.102 m = 12; n = 30 × 12 = 360; i = m = 12 = 0.0085. 1 − (1.0085)−360 \$96, 000 = PMT 0.0085 university-logo Jason Aubrey Math 1300 Finite Mathematics
96. 96. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 1: Find monthly payments. The owner put 20% down at the time of purchase. Therefore, PV = \$120, 000 − (0.2)(\$120, 000) = \$96, 000. We also have that r 0.102 m = 12; n = 30 × 12 = 360; i = m = 12 = 0.0085. 1 − (1.0085)−360 \$96, 000 = PMT 0.0085 PMT = \$856.69 university-logo Jason Aubrey Math 1300 Finite Mathematics
97. 97. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 2: Find amount owed after 10 years (at the time ofreﬁnancing). university-logo Jason Aubrey Math 1300 Finite Mathematics
98. 98. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 2: Find amount owed after 10 years (at the time ofreﬁnancing).Here we apply the formula with i = 0.0085 and n = 240. university-logo Jason Aubrey Math 1300 Finite Mathematics
99. 99. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 2: Find amount owed after 10 years (at the time ofreﬁnancing).Here we apply the formula with i = 0.0085 and n = 240. 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
100. 100. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 2: Find amount owed after 10 years (at the time ofreﬁnancing).Here we apply the formula with i = 0.0085 and n = 240. 1 − (1 + i)−n PV = PMT i 1 − (1.0085)−240 PV = (\$856.69) = \$87, 568.38 .0085 university-logo Jason Aubrey Math 1300 Finite Mathematics
101. 101. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 3: We now calculate the owner’s monthly payment afterreﬁnancing. university-logo Jason Aubrey Math 1300 Finite Mathematics
102. 102. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 3: We now calculate the owner’s monthly payment afterreﬁnancing. 0.075Here we apply the formula with i = 12 = 0.00625 andn = 240. university-logo Jason Aubrey Math 1300 Finite Mathematics
103. 103. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 3: We now calculate the owner’s monthly payment afterreﬁnancing. 0.075Here we apply the formula with i = 12 = 0.00625 andn = 240. 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
104. 104. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 3: We now calculate the owner’s monthly payment afterreﬁnancing. 0.075Here we apply the formula with i = 12 = 0.00625 andn = 240. 1 − (1 + i)−n PV = PMT i 1 − (1.00625)−240 \$87, 568.38 = PMT .00625 university-logo Jason Aubrey Math 1300 Finite Mathematics
105. 105. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 3: We now calculate the owner’s monthly payment afterreﬁnancing. 0.075Here we apply the formula with i = 12 = 0.00625 andn = 240. 1 − (1 + i)−n PV = PMT i 1 − (1.00625)−240 \$87, 568.38 = PMT .00625 .00625 PMT = (\$87, 568.38) = \$705.44 1 − (1.00625)−240 university-logo Jason Aubrey Math 1300 Finite Mathematics
106. 106. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 4: We now compare the amount he would have spentwithout reﬁnancing to the amount he spends after reﬁnancing. university-logo Jason Aubrey Math 1300 Finite Mathematics
107. 107. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 4: We now compare the amount he would have spentwithout reﬁnancing to the amount he spends after reﬁnancing. If the owner did not reﬁnance, he would pay a total of 856.69 × 240 = \$205, 605.60 in principal and interest during the last 20 years of the loan. university-logo Jason Aubrey Math 1300 Finite Mathematics
108. 108. Present Value of an Ordinary Annuity Amortization Amortization SchedulesStep 4: We now compare the amount he would have spentwithout reﬁnancing to the amount he spends after reﬁnancing. If the owner did not reﬁnance, he would pay a total of 856.69 × 240 = \$205, 605.60 in principal and interest during the last 20 years of the loan. This would amount to a total of \$205, 605.60 − \$87, 568.38 = \$118, 037.22 in interest. university-logo Jason Aubrey Math 1300 Finite Mathematics
109. 109. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAfter reﬁnancing, the owner pays a total of\$705.44x240 = \$169, 305.60 in principal and interest. university-logo Jason Aubrey Math 1300 Finite Mathematics
110. 110. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAfter reﬁnancing, the owner pays a total of\$705.44x240 = \$169, 305.60 in principal and interest.This would amount to a total of\$169, 305.60 − \$87, 568.38 = \$81, 737.22 in interest. university-logo Jason Aubrey Math 1300 Finite Mathematics
111. 111. Present Value of an Ordinary Annuity Amortization Amortization SchedulesAfter reﬁnancing, the owner pays a total of\$705.44x240 = \$169, 305.60 in principal and interest.This would amount to a total of\$169, 305.60 − \$87, 568.38 = \$81, 737.22 in interest.Therefore reﬁnancing results in a total interest savings of \$118, 037.22 − \$81, 737.22 = \$36, 299.84. university-logo Jason Aubrey Math 1300 Finite Mathematics
112. 112. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: You want to purchase a new car for \$27,300. Thedealer offers you 0% ﬁnancing for 60 months or a \$5,000rebate. You can obtain 6.3% ﬁnancing for 60 months at thelocal bank. Which option should you choose? university-logo Jason Aubrey Math 1300 Finite Mathematics
113. 113. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: You want to purchase a new car for \$27,300. Thedealer offers you 0% ﬁnancing for 60 months or a \$5,000rebate. You can obtain 6.3% ﬁnancing for 60 months at thelocal bank. Which option should you choose?To answer this question, we determine which option gives thelowest monthly payment. university-logo Jason Aubrey Math 1300 Finite Mathematics
114. 114. Present Value of an Ordinary Annuity Amortization Amortization SchedulesExample: You want to purchase a new car for \$27,300. Thedealer offers you 0% ﬁnancing for 60 months or a \$5,000rebate. You can obtain 6.3% ﬁnancing for 60 months at thelocal bank. Which option should you choose?To answer this question, we determine which option gives thelowest monthly payment.Option 1: If you choose 0% ﬁnancing, your monthly paymentwill be \$27, 300 PMT1 = = \$455 60 university-logo Jason Aubrey Math 1300 Finite Mathematics
115. 115. Present Value of an Ordinary Annuity Amortization Amortization SchedulesOption 2: Suppose that you choose the \$5,000 rebate andborrow \$22,300 for 60 months at 6.3% compounded monthly. university-logo Jason Aubrey Math 1300 Finite Mathematics
116. 116. Present Value of an Ordinary Annuity Amortization Amortization SchedulesOption 2: Suppose that you choose the \$5,000 rebate andborrow \$22,300 for 60 months at 6.3% compounded monthly.We compute the PMT for a loan with PV = \$22,300,i = 0.063 = 0.00525 and n = 60. 12 university-logo Jason Aubrey Math 1300 Finite Mathematics
117. 117. Present Value of an Ordinary Annuity Amortization Amortization SchedulesOption 2: Suppose that you choose the \$5,000 rebate andborrow \$22,300 for 60 months at 6.3% compounded monthly.We compute the PMT for a loan with PV = \$22,300,i = 0.063 = 0.00525 and n = 60. 12 1 − (1 + i)−n PV = PMT i university-logo Jason Aubrey Math 1300 Finite Mathematics
118. 118. Present Value of an Ordinary Annuity Amortization Amortization SchedulesOption 2: Suppose that you choose the \$5,000 rebate andborrow \$22,300 for 60 months at 6.3% compounded monthly.We compute the PMT for a loan with PV = \$22,300,i = 0.063 = 0.00525 and n = 60. 12 1 − (1 + i)−n PV = PMT i 1 − (1.00525)−60 \$22, 300 = PMT 0.00525 university-logo Jason Aubrey Math 1300 Finite Mathematics
119. 119. Present Value of an Ordinary Annuity Amortization Amortization SchedulesOption 2: Suppose that you choose the \$5,000 rebate andborrow \$22,300 for 60 months at 6.3% compounded monthly.We compute the PMT for a loan with PV = \$22,300,i = 0.063 = 0.00525 and n = 60. 12 1 − (1 + i)−n PV = PMT i 1 − (1.00525)−60 \$22, 300 = PMT 0.00525 PMT = \$434.24 university-logo Jason Aubrey Math 1300 Finite Mathematics
120. 120. Present Value of an Ordinary Annuity Amortization Amortization SchedulesOption 2: Suppose that you choose the \$5,000 rebate andborrow \$22,300 for 60 months at 6.3% compounded monthly.We compute the PMT for a loan with PV = \$22,300,i = 0.063 = 0.00525 and n = 60. 12 1 − (1 + i)−n PV = PMT i 1 − (1.00525)−60 \$22, 300 = PMT 0.00525 PMT = \$434.24You should choose the rebate. You will save \$455 - \$434.24 =\$20.76 monthly, or (\$20.76)(60) = \$1,245.60 over the life of theloan. university-logo Jason Aubrey Math 1300 Finite Mathematics