Finite Math 5.

3 Amortization and Sinking Funds Name__________________

FUTURE PROJECTED PROJECT

Now that you have chosen a dream car, lets use the Amortization Formula find how
much you will need to pay off the loan every year. (HINT: Use Example 1 on 5.3
notes/power point slide 7.)

Dream Car:
Make _______________________________ Model: _______________ Cost:
______________________

1.Calculate how much you will need to pay the loan if the interest rate is at 8% per
year is charged on the unpaid balance at the end of each year. Determine the size
of each installment so that the loan is amortized at the end of (a) 3 years, (b) 5
years, and (c) 7 years. Verify the result by displaying the amortization schedule.
(HINT: Use 5.3 Notes page 1 &2/ power point slide 7)

R= size of each installment (payment made)

P = Loan amount (in dollars)
r= rate of interest charged per period
m= how many times compounded or paid per year
t= time (in years)

a. Amortize the loan by the end of 3 years.

r
i= = n=mt=
P= , m , and .

We plug it into
Pi
R= n
1( 1+i )

1+


1
( )()
R=

Thus, the required yearly installment (payment) would be $

.

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FUTURE PROJECTED PROJECT
Finite Math 5.3 Amortization and Sinking Funds Name__________________

Table to amortize the loan at the end of 3 years:

End Interest Repayment Payment Toward Outstanding

of Charged Made Principal Principal
Perio
d
0
1
2
3

b. Amortize the loan by the end of 5 years.

r
i= = n=mt=
P= , m , and .

We plug it into
Pi
R=
1( 1+i )n

1+


1
( )()
R=

Thus, the required yearly installment (payment) would be $

.

Table to amortize the loan at the end of 5 years:

End Interest Repayment Payment Toward Outstanding

of Charged Made Principal Principal
Perio
d
0

1
FUTURE PROJECTED PROJECT
Finite Math 5.3 Amortization and Sinking Funds Name__________________

c. Amortize the loan by the end of 7 years.

r
i= = n=mt=
P= , m , and .

We plug it into
Pi
R=
1( 1+i )n

1+


1
( )()
R=

Thus, the required yearly installment (payment) would be $

.

Table to amortize the loan at the end of 7 years:

End Interest Repayment Payment Toward Outstanding

of Charged Made Principal Principal

1
FUTURE PROJECTED PROJECT
Finite Math 5.3 Amortization and Sinking Funds Name__________________

Perio
d
0

2. Calculate how much you will need to pay the car loan if the interest rate is at 8%
per year is charged on the unpaid balance at the end of each month. Determine the
size of each installment so that the loan is amortized at the end of 5 years. Verify
the result by displaying the amortization schedule.
Solution:
Amortize the loan by the end of 5 years. (m=12 since paying monthly)

r
i= = n=mt=
P= , m , and .

We plug it into
Pi
R=
1( 1+i )n

1
FUTURE PROJECTED PROJECT
Finite Math 5.3 Amortization and Sinking Funds Name__________________

1+


1
( )()
R=

Thus, the required monthly installment (payment) would be $

.

If we were to make an amortization schedule table, this would make for an

extensive amortization schedule that would show all 60 payments.

Dream Home:
Location (City, State): _______________________________
Bedrooms: _____ Bathrooms: _____ Sq. Ft.: _________________ Cost:
___________________

3. Suppose you borrow from the bank the amount of the home cost of
___________________. The bank charges interest at a rate of 5.4% per year on
the unpaid balance, with interest computations made at the end of each
month. You agree to repay the loan in equal monthly installments over 30

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FUTURE PROJECTED PROJECT
Finite Math 5.3 Amortization and Sinking Funds Name__________________

years. How much should each payment b if the loan is to be amortized at the
end of the tem? (HINT: Use 5.3 Notes/ power point slide 12)

Solution:

r
i= =
P= , m , and n = .

We plug it into

Pi
R=
1( 1+i )n

1+


1
( )()
R=

Thus, the required monthly installment (payment) would be $

.

1
FUTURE PROJECTED PROJECT
Finite Math 5.3 Amortization and Sinking Funds Name__________________

4. Suppose we calculate how much you can afford for a monthly house
payment.
(HINT: Use 5.3 Notes/ power point slide 14)
For this calculation, assume you only want to use 40% of your monthly
income to pay for a monthly house payment. Calculate:

afford
(Dream Job Salary)
(make monthly home payment)= ( 0.4 )
12

( 0.4 )

Now we solve the previous equation for P (the loan amount), we get:

P=R [
1( 1+i )n
i ]
Lets plug in the information we have:

r
i= =
R= , m , and n =mt =

We plug it into

P=R [
1( 1+i )n
i ]

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FUTURE PROJECTED PROJECT
Finite Math 5.3 Amortization and Sinking Funds Name__________________

1+
(
]

1 =

P=

Thus, you can borrow at most $____________________________________ from the

bank.

Therefore you would seek a house that cost at most the amount you can
borrow from the bank.

According to this calculation, would you be able to buy your dream home?
Explain.

______________________________________________________________________________
_____________________________________________________________________________

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FUTURE PROJECTED PROJECT