| Amortization of Loans and Mortgages

CASE

12a

Financing a Growing Business

Jane, Georgia, and Melody started a cupcake business in their final year in college, registering the company as 'Sugary

Bites'. They needed measuring cups, mixers, a food processor, and other baking equipment to prepare for production.

This equipment cost a total of $1500, which the entrepreneurs financed through a loan from a bank at 12.5% compounded

monthly, amortized over two years. Within a week, they started making cupcakes and delivering them to their college

cafeteria.

Within two months, Sugary Bites cupcakes was the talk of the college campus and the bakery business was making modest

profits. After graduating, the three budding entrepreneurs decided to expand their operation. They rented a retail store in

the city and added ten new cupcake flavours to their product line. They also hired an assistant to run the store and a delivery

person to handle personal orders.

After two years of successfully managing Sugary Bites, they saved enough money to use as a down payment to purchase a small

shop where they could make their cupcakes, and a delivery truck to deliver them. They identified a $108,000 commercial property

and secured a mortgage for 80% of its value to purchase it. The fixed interest rate on the mortgage was 3.4% compounded semi-

annually for an amortization period of five years. They also purchased a delivery truck for the business at a cost of $18,500 and

financed 80% of it at 7% compounded monthly. They made monthly payments of $300 towards this loan.

Answer the following questions related to each of their debts:

Startup Loan

a.

What were their monthly payments to settle this loan?

b.

What was the principal balance on the loan after one year?

c.

Construct an amortization schedule for this loan.

Mortgage

d.

Calculate the size of their monthly payments rounded to the nearest $10.

e.

By how much would their amortization period have shortened if they had made a lump-sum payment of $10,000 at the end of the 3rd year of the mortgage and increased their periodic payment by 30% after the 40th payment? Use the round payment determined in question d

Delivery Truck Loan

f.

How long would it take to settle this loan with regular monthly payments of $300?

g.

On their 20th payment, what will be the interest portion and what will be the principal portion?

h.

Construct a partial amortization schedule showing details of the first two payments, last two payments, total payment

made, and the total interest paid towards this loan.