Your firm purchased commercial real estate 5 years ago by taking out a loan for

Question

Your firm purchased commercial real estate 5 years ago by taking out a loan for one million dollars. The loan was for 10 years at an annual rate of 6% compounded monthly, with monthly loan payments. Now, 5 years later, your company has an opportunity to reduce the loan interest rate to 4% annual rate, compounded monthly. Your monthly MARR is .04/12.

If your company intends to keep the property for the next 5 years, what value below is closest to the most you would advise them to pay now for this opportunity to refinance the loan?

a) $8,450

b) $14,600

c) $23,700

d) $28,600

e) $34,000

f) $37,300

Explanation / Answer

Going as per the earlier rate of 6% monthly compound interest, the value of the loan at the end of 5 years (month 60) works out to $ 1,348,850

Alternatively, applying the rate of 4% monthly compound interest, keeping other factors constant, the value of the loan at the end of 5 years works out to # 1,220,997

Considering a monthly MARR of .04/12, the value which will be closest to the repayment for the opportunity to refinance this loan would be $ 34,000.

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