June 23, 2013
June 23, 2013
June 26, 2013
23.981.1 - 23.981.10
Present Value Analysis of Traditional Loans Students have difficulty utilizing the various formulas for determining the amounts ofprincipal and interest of traditional loans over the various periods of the loan. Studentsunderstand the calculation of the amount of the loan payment and that the amount of interest willdecrease with each payment and the amount of principal will increase over the life of the loan.They also realize that the total amount of the principal over the life of the loan must be equal tothe initial amount of the loan. The problem is that the amounts vary for each period and there isno apparent insight as to why they vary the way they do. The present value analysis of thepayments illustrates quite vividly an understanding of the amounts of principal and interest andprovides an easy method for calculating the amounts of interest and principal for each period.Once one determines the present value of the principal for the first period, all other calculationsfor the principal and interest in any period can easily be calculated from the loan payment andthe present value of the loan principals. This also provides an easy procedure for calculating theprincipal and interest amounts for any payment period and the total present worth values of theinterest and principal are also equivalent to the initial amount of the loan. This paper willillustrate the calculations and the results will illustrate that students in engineering economicsand business will have a much greater chance of understanding the basis of loan payments andthe principal and interest components.
Creese, R. C. (2013, June), Present Value Analysis of Traditional Loans Paper presented at 2013 ASEE Annual Conference & Exposition, Atlanta, Georgia. 10.18260/1-2--22366
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