**‘What is Amortization?**

Firstly, what is amortization? Amortization is the process of distributing the cost of an investment over time. Essentially, it involves calculating how much you spend on an investment annually and measuring the revenue generated by that investment within the same period. Let’s consider a simple example.

Imagine you own a plushie company that produces numerous plushies, and you’ve discovered a way to increase production – by building a factory costing 100 million dollars. With each plushie selling for 20 dollars, is this substantial investment worthwhile? Amortization can help answer that question.

Suppose the factory produces 10,000 products daily, each selling for 20 dollars. This means it generates 200,000 dollars worth of products per day. Ignoring expenses, it would only take 50 days for the factory to recoup the initial investment.

However, let’s factor in a production cost of 10 dollars per plushie; now, it takes 100 days to recover the money invested. Keep in mind that predictions can be uncertain and require careful consideration.

For instance, Crocs – a company that manufactured unusual rubber shoes – anticipated high sales and produced thousands of units, only to fall short of their sales expectations. Consequently, they failed to recoup their investment, resulting in a significant loss.

**What is Loan Amortization?**

Another aspect of amortization is loan amortization – a common method of repaying loans by spreading the due amount across a specified time period. For example, if you need to repay a 100,000-dollar loan with interest in 12 months, there are numerous ways to approach repayment. You could pay a large sum initially and gradually decrease payments each month or extend your repayment period beyond 12 months with smaller installments.

Alternatively, you could use amortization to distribute the repayment evenly over the agreed period. In this case, you’d pay back 8,333 dollars monthly for 12 months – totaling approximately 100,000 dollars.

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