Separating Interest and Principal in Loan Payments
When a business decision involves loans and income taxes at the same time, you need to be able to separate the principal part of the loan payments from the interest part because the interest payments are usually deductible but the principal payments aren't. Income taxes are discussed in detail in Chapters 16 and 17.
Even though each of the loan payments is the same amount of money, early payments are more interest and less principal, whereas later payments are more principal and less interest. Figure 6.3 shows a cash-flow diagram annotated with the interest-to-principal profile for a $1000, 8%, 10-year loan with annual payments.
Figure 6.3. An interest-to-principal profile on an example loan ...
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