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Calculating the loan amount

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Suppose you are a loan officer for a bank. A start-up company has qualified for a loan. You are pondering various proposals for repayment:

1. Lump sum of $500,000 four years hence. How much will you lend if your desired rate of return is:

a. 12%, compounded annually?
b. 16%, compounded annually?

2. Repeat number 1, but assume that the interest rates are compounded semiannually.

3. Suppose the loan is to be paid in full by equal payments of $125,000 at the end of each of the next 4 years. How much will you lend if your desired rate of return is:

a. 12%, compounded annually?
b. 16%, compounded annually?

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Solution Preview

Suppose you are a loan officer for a bank. A start-up company has qualified for a loan. You are pondering various proposals for repayment:

1. Lump sum of $500,000 four years hence. How much will you lend if your desired rate of return is:
a. 12%, compounded annually?

Amount to be returned after 4 years=FV=$500,000
Number of periods=n=4 (years)
Rate of return=r=12% (annual)
Amount that can be given =Present value of $500,000 to be received after 4 years=PV=?

PV=FV/(1+r)^n=500000/(1+12%)^4=$317,759

b. 16%, compounded annually? ...

Solution Summary

Solution describes the steps to calculate loan amount at two different rate of interest in case a lump sum amount is to be received after loan period. It also calculates loan amount at two different rate of interest in case repayment is done by equal annual payments.

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Deflections, LLC, currently net leases its headquarters office building for $50,000 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.

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