Purchase Solution

# 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% 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% annual interest, amortized in equal monthly P&I payments over 25 years, and the company limits these payments to \$60,000 per month, how much can it finance with this loan?

c. If this mortgage loan would be at 5% annual interest, amortized in equal monthly P&I payments over 25 years, and the company limits these payments to \$70,000 per month, how much can it finance with this loan?

##### Solution Summary

The solution explains how to determine the maximum amount of loan given time period, interest rate and installments

##### Solution Preview

What the company can finance would be the present value of the payments. The payments are an annuity and so we use the present value of annuity formula to find the amount that the company can finance.
PV of annuity = PMT [(1 - (1 / (1 + i)^n)) / i]
where
PMT = monthly payment
i = monthly rate
n = time period

a. If this mortgage loan would be at 6% annual interest, amortized in ...

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