AMORTAZATION

 Amortization refers to the repayment of loan through a fixed repayment schedule in regular
payment over a period of time.
 Each payment includes both interest on the outstanding amount of loan and principa l
amount.
 It is an accounting term that refers to the process of allocating the cost of an intangib le
asset over a period of time.
 In amortization, all liabilities i.e. loan and interest are discharged by a sequence of equal
payments.
 A loan is amortized if both the capital and interest are paid by a sequence of periodic
payments.
 This is done by applying the concept of present value of an annuity.

Why does amortization matter?

 The length of time over which various intangible assets are amortized vary widely from a
few years to as many as 4o years.
 In general, an asset should be amortized over its estimated useful life time or the maturity
or loan period.
 If intangible asset has indefinite life time such as goodwill it cannot be amortized.
 Amortization refers to an intangible assets while depreciation refers to tangible assets and
depletion refers to natural resources.
Amortization payment is 1calculated using the formula;

𝑖 (1+𝑖 )𝑛 𝑖
𝐴= 𝑃𝑉 (( )𝑛 ) which can be simplified to 𝐴 = 𝑃𝑉 ( )
1+𝑖 −1 1−(1+𝑖 )−𝑛
𝑟
where 𝑖 = 𝑚 , 𝑛 = 𝑚𝑡 and each symbol carries the usual meaning.
Amortization schedule
 This is a complete table of periodic loan payments showing the amount of principal and
amount o interest that comprises each payment until the loan is paid off at the end of its
term.
 The format of the amortization schedule is as shown below
End of period Installments Interest, Reducing loan Outstanding loan
payment, 𝑁𝑂 payment, 𝐴 𝐼 = 𝑖 × 𝑙𝑜𝑎𝑛 ∆= 𝐴 − 𝐼 𝑙𝑜𝑎𝑛 = 𝑙𝑜𝑎𝑛𝑏𝑒fore − ∆
1.
2.
3.
4.

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Practice Questions
1. ESD printing company borrowed TZS 800,000 from Exim bank to buy a photocopier
machine. The company agreed to repay the loan by making equal quarterly payments for 2
years with an annual interest rate of 12% at the end of each quarter.
(a) What is the size of the quarterly payment?
(b) What is the interest in the first payment of ESD printing company?
(c) Prepare ESD printing company amortization schedule showing the details of
payments.
Solution:
(a) Given that 𝑃𝑉 𝑜𝑟 𝑙𝑜𝑎𝑛 = 𝑇𝑍𝑆 800,000, 𝑟 = 12% = 0.12, 𝑡 = 2 𝑦𝑒𝑎𝑟𝑠,
𝑟 0.12
𝑚 = 4 (𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦). Thus 𝑖 = 𝑚 = 4 = 0.03 and 𝑛 = 𝑚𝑡 = 4 × 2 = 8
𝑖
Using 𝐴 = 𝑃𝑉 (1−(1+𝑖 )−𝑛 ) we get
0.03
𝐴 = 800,000 ( ) = 𝑇𝑍𝑆 113,965.11.
1− (1+0.03)−8
Hence the size of payment in each quarter will be TZS 113,965.11

(b) The interest in the first payment, 𝐼 = 𝑖 × 𝑙𝑜𝑎𝑛 = 0.03 × 800,000 = 𝑇𝑍𝑆 24,000.

(c) Amortization schedule or ESD printing company is as shown below. All amounts are
in TZS.
End of period Installments Interest, Reducing loan Outstanding loan
payment, 𝑁𝑂 payment, 𝐴 𝐼 = 𝑖 × 𝑙𝑜𝑎𝑛 ∆= 𝐴 − 𝐼 𝑙𝑜𝑎𝑛 = 𝑙𝑜𝑎𝑛𝑏𝑒fore − ∆
0. - - - 800,000
1. 113,965.11 24,000.00 89,965.11 710,034.89
2. 113,965.11 21,301.05 92,664.06 617,370.82
3. 113,965.11 18,521.12 95,442.99 521,926.84
4. 113,965.11 15,657.81 98,307.31 423,619.53
5. 113,965.11 12,708.59 101,256.53 322,363.00
6. 113,965.11 9,670.89 104,294.22 218,068.79
7. 113,965.11 6,542.06 107,423.05 110,645.74
8. 113,965.11 3,319.74 110,645.74 0.00

2. A loan of TZS 2,000,000 bearing an interest of 25% per annum is to be amortized by 5

equal annual installments made at the end of each year.
(a) Find the size of each annual installment.
(b) Prepare the amortization schedule.
3. A loan of TZS 10,000,000 bearing an interest of 24% per annum is to be amortized by 5
equal annual installments made at the end of each year.

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 (c) Find the size of each annual installment.
(d) Prepare the amortization schedule.

Mortgage loans
This refers to the loan secured by some physical property, usually a house or car or land
etc. The borrower is the owner of the property.

Example:
A couple wish to purchase a house for TZS 36,000,000with a down payment of 20%. They can
amortize the loan at 12% compounded quarterly for 25 years. Assuming that the interest will
remain the same for the entire 25 years, calculate to the nearest TZS
(a) the size of each payment,
(b) the seller’s equity after the 40th payment has been made, and
(c) The owner’s equity after the 40th payment has been made.
Solution: The present value of the loan is given as
𝑇𝑍𝑆 36,000,000 − 20% × 36,000,000 = 𝑇𝑍𝑆 28,800,000.

(a) Given that 𝑃𝑉 𝑜𝑟 𝑙𝑜𝑎𝑛 = 𝑇𝑍𝑆 28,800,000, 𝑟 = 12% = 0.12, 𝑡 = 25 𝑦𝑒𝑎𝑟𝑠,

𝑟 0.12
𝑚 = 4 (𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦). Thus 𝑖 = = = 0.03 and 𝑛 = 𝑚𝑡 = 25 × 4 = 100.
𝑚 4
𝑖
Using 𝐴 = 𝑃𝑉 ( ) we get
1−(1+𝑖 )−𝑛
0.03
𝐴 = 28,800,000 (1−(1+0.03)−100 ) = 911,423.98.
Hence the size of payment in each quarter will be TZS 911,423.98
(b) The seller’s equity is the principal outstanding yet to be paid to the seller. Thus, after 40
payments has been made, there are still 60 payment to be made. Hence the PV o the
remaining payments is given by
1− (1+𝑖 )−𝑛 1−(1−0.03)−100
𝑃𝑉 = 𝐴 ( ) = 911,423.98 ( )=
𝑖 0.03
𝑇𝑍𝑆 25,224,172.39.
Therefore the seller’s equity after 40th payment has be made is TZS 25,224,172.39
(c) The owner’s equity is the principal that has been paid including the down payment if any.
It is also referred to as buyer’s equity. Hence the owner’s equity is given by
𝑜𝑤𝑛𝑒 𝑟 ′ 𝑠𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑐𝑎𝑠ℎ 𝑣𝑎𝑙𝑢𝑒 − 𝑠𝑒𝑙𝑙𝑒 𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 = 28,800,000 − 25,224,172.39 = 3,575,827.61.
Therefore the owner’s or buyer’s equity is TZS 3,575,827.61.

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Practice question:
1. College of business education has borrowed TZS 1.2 billion from NSSF for the
construction of Female hostels in Dodoma campus. Usually NSSF charges 10% margins
for their money and then the principal and interest of 16% are to be paid in equal
semiannual payments for 10 years.
(a) Find the size of each payment,
(b) the seller’s equity after 15th payments has been made, and
(c) The buyer’s equity after 15th payments has been made.
2.

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