1) You are ready to buy a house and you have $20,000 for a down payment and clos
ID: 2634557 • Letter: 1
Question
1) You are ready to buy a house and you have $20,000 for a down payment and closing costs. Closing costs are estimated to be 4% of the loan value. You have an annual salary of $36,000 and the bank is willing to allow your monthly mortgage payment to be equal to 28% of your monthly income. The interest rate on the loan is 6% per year with monthly compounding (.5% per month) for a 30-year fixed rate loan.
A) How much are your monthly payments?
B) How much money will the bank lend you?
C) How much can you offer for the house?
2) The Black Horse is currently considering a project that will produce cash inflows of
$12,000 a year for three years followed by $6,500 in year four, and 5,000 for the next
two years. The cost of the project is $48,000. If the discount rate is 7 percent, determine:
(a) NPV
(b) IRR
(c) Profitability Index
(d) Payback Period
(e) Should The Black Horse accept or reject this project, and why?
3 )A project has the following cash flows:
Year Cash flow
0 ------------- ( -$390,000)
1 & 3 ----------- ( $168,000)
2 , 4 & 7 ----------- ( $190,000)
5 & 6 ------------- ( $218,600)
Calculate: a) NPV
b) PI
c) IRR
d) Payback Period
If your required return is 40%, and the required payback period is 2.25 years,
should you accept or reject this project, and why?
Explanation / Answer
a)
monthly payments = 36000/12 * 0.28 = 840
b)
amount of loan = 840 * [1-(1+0.005)^-360]/0.005 = 140104.96
c)
amount can offer = 20000 + 140104.96 - 140104.96 *0.04 = 154500.76
2)
a)
NPV = -48000 + 12000/1.07 + 12000/1.07^2 + 12000/1.07^3 + 6500/1.07^4 + 5000/1.07^5
= -7984.46
b)
0 = -48000 + 12000/(1+IRR) + 12000/(1+IRR)^2 + 12000/(1+IRR)^3 + 6500/(1+IRR)^4 + 5000/(1+IRR)^5
IRR = -0.4%
c)
PV of cash flows = 40015.54
profitability index = 40015.54/48000 = 0.833
d)
payback period = 0
since project never payback
e)
reject this project
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