Purchase Solution

# Calculating Maximum amount of Loan

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Deflections, LLC, currently net leases its headquarters office building for \$70,000 per month, and this lease has two years left to run. (Under a commercial fully net lease, the tenant pays for all maintenance, repairs, insurance and property taxes.) Deflections considers the rent to be less than the current market rate, but expected growth in its headquarters staff will require it to spend \$1 million in repartitioning, wiring and lighting this office space. As an alternative, it is considering building its own HQ building and financing it with a down payment of \$1 million and the remainder with a mortgage loan. Develop the following four alternatives for financing the project:

a. If this mortgage loan would be at 6.5% annual interest, amortized in equal monthly P&I payments over 25 years, and the company limits these payments to the same \$70,000 per month, how much can it finance with this loan?

b. If this mortgage loan would be at 7.79% annual interest, amortized in equal monthly P&I payments over 30 years, and the company limits these payments to \$55,000 per month, how much can it finance with this loan?

c. If this mortgage loan would be at 5.75% annual interest, amortized in equal monthly P&I payments over 25 years, and the company limits these payments to \$62,000 per month, how much can it finance with this loan?

##### Solution Summary

Solution describes the steps to calculate maximum loan amount possible with different combinations of annual interest rate and maximum monthly payments.

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Solution:

a. If this mortgage loan would be at 6.5% annual interest, amortized in equal monthly P&I payments over 25 years, and the company limits these payments to the same \$70,000 per month, how much can it finance with this loan?

Rate of interest per month=r=6.5%/12=0.5417%
Number of installment=n=25*12=300
Maximum Monthly Payments=C=\$70000
Present Value of annuity=C/r*(1-1/(1+r)^n)
=70000/0.5417%*(1-1/(1+0.5417%)^300)
=\$10,366,805
Amount that can be financed with this Loan amount=\$10,366,805

b. If ...

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• BEng (Hons) , Birla Institute of Technology and Science, India
• MSc (Hons) , Birla Institute of Technology and Science, India
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