Borrow €60,000 for ten years. Pay 12% annual interest to the lender and repay all principal at year 10. Separately, deposit a constant amount at each year-end into a fund earning 8%. The fund pays the principal at maturity.
€4,141.77 annual fund deposit.
| Year | Loan interest | Fund deposit | Fund interest | Fund balance* | Debt remaining |
|---|---|---|---|---|---|
| 1 | 7,200.00 | 4,141.77 | 0.00 | 4,141.77 | 60,000.00 |
| 2 | 7,200.00 | 4,141.77 | 331.34 | 8,614.88 | 60,000.00 |
| 3 | 7,200.00 | 4,141.77 | 689.19 | 13,445.84 | 60,000.00 |
| 4 | 7,200.00 | 4,141.77 | 1,075.67 | 18,663.28 | 60,000.00 |
| 5 | 7,200.00 | 4,141.77 | 1,493.06 | 24,298.11 | 60,000.00 |
| 6 | 7,200.00 | 4,141.77 | 1,943.85 | 30,383.73 | 60,000.00 |
| 7 | 7,200.00 | 4,141.77 | 2,430.70 | 36,956.19 | 60,000.00 |
| 8 | 7,200.00 | 4,141.77 | 2,956.50 | 44,054.46 | 60,000.00 |
| 9 | 7,200.00 | 4,141.77 | 3,524.36 | 51,720.58 | 60,000.00 |
| 10 | 7,200.00 | 4,141.77 | 4,137.65 | 60,000.00 | 0.00 |
*The year-10 fund balance is shown immediately before it repays the loan. It is zero immediately after repayment. The lender’s principal does not decline during accumulation.
€44,054.46
Total annual cash outlay before using the fund at maturity: €11,341.77.