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Author Archives: Anonymous

Mortgages and other consumer loans when taken by an individu…

Mortgages and other consumer loans when taken by an individual have an interest rate charged by the bank ‘r’.  The borrower pays back the loan in periodic uniform payments of ‘A’ each.  The people involved in the loan market, however, use specific and sometimes confusing jargon.  For example, interest rates are quoted in percent per year, but are compounded monthly thus, r/12 is more accurately designated as the monthly rate.  Letting ‘rm’ = r/12.  With such repayments lenders are often required by law to provide the borrower with an amortization schedule, which is a list of all the payments with portion of the payment that is applied to interest and portion of the payment that is applied to the loan principal. Additionally, we define the remaining principal after payment M, RPm, as the present value (in time M dollars) of the payments remaining after a particular loan payment is made; the interest portion of payment M, Im, as the monthly interest rate multiplied by the remaining principal after the previous payment; and the total interest paid, TI, as the sum of the interest payments across all M. Suppose that you take a home loan of $300,000, the quoted interest rate (APR) is 7% per year, and the duration of the loan is 30 years (360 months).  Calculate: What is the effective annual interest rate for this problem, ieff? What is the equivalent interest for the time period, iper? Periodic payment amount, A What is the remaining balance at the end of 12 years, RP144? Develop an excel model to check your above answers and to: Generate an amortization schedule for this loan Determine the total interest paid, TI?

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Creamy Dairy is a family owned dairy located in upstate New…

Creamy Dairy is a family owned dairy located in upstate New York. They are trying to decide how to process their corn into feed for their livestock.  Because they are dairy farmers (and good ones at that) financial choices have a mystic quality about them so they could use your help.  The farm is currently earning $300,000 per year so this improvement would be additional revenue. Each of the options will result in an additional (above the current dairy earnings) yearly PRE-TAX cash flow of $100,000 for fifteen years starting at time 1.  The following table shows their choices: Option 1: Subcontract the feed process at a cost of $75,000 per year starting at time 1. Option 2: Upgrade their current feed facilities at a cost of $200,000 for equipment and yearly maintenance cost of $25,000. Option 3: Build a new facility for $300,000 with no maintenance required for ten years then $15,000 for the remaining useful life. Creamy Dairy uses a cost of capital of 4.0%.  Assume no short-term debt, a market rate of 8%, risk free rate of 2.5%, and an income tax rate of 35%.  Use this rate for the rest of the questions. Create an Excel model (use the blank template provided) and determine the NPW/AEW of the three options.

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