Let’s divide the problem in terms of cash inflows and outflows. Profit earned=Inflows-Outflows
Initial Inflow=25,00,000
After 1st year:-
- Inflow=20%of25,00,000=5,00,000
- Outflow=5,00,000(As he paid off this amount of loan at the end of 1st year)
- Net gain=Inflow-Outflow=0
- Loan amount at the end of 1st year= 25,00,000(1.12)=28,00,000
- Amount after repayment of 5,00,000=23,00,000
As CI is calculated annually, the new amount will be calculated on the outstanding amount after the end of 1st year.
Amount to be paid off at the end of 2nd year=23,00,000(1.12)=2576000
After 2nd year:-
- Inflow=20% of 25,00,000-5,00,000
- Outflow=2576000
Overall gain=Initial Inflow+Inflow in 2 yrs – outflow at the end of 2nd year= 25,00,000+5,00,000-2576000= 424000