17A) Robert is considering the purchase of 80 acres of land South Texas for $3,2

Question

17A)

Robert is considering the purchase of 80 acres of land South Texas for $3,256.38 per acre. A bank will loan him $3,030.00 per acre of land and the loan will be fully amortized over 12 years at 9%. The outstanding balance of loan will be paid at the end of the fifth year. Assume that the marginal tax rate is 14% and the inflation rate is 3%.

Calculate the loan payment.

            a. $423                                  b. $578

            c. $272                                    d. None of the answers are correct

Calculate the interest paid in the second year.

            a. $259                                  b. $244

            c. $272                                    d. None of the answers are correct

Calculate the tax savings from interest payments in the first year.

            a. $36                          b. $38.18

            c. $34                          d. None of the answers are correct

Calculate the loan balance at the end of the second year.

            a. $2,879                                 b. $2,536.84

            c. $2,715                               d. None of the answers are correct

Explanation / Answer

Calculate Loan payment:

EAI = Loan Amount / PVAF( r% , n Years )

= $ 3,030 / PVAF ( 9%, 12 Years )

= $ 3,030 / 7.1607

= $ 423.14

Answer A is correct

Interest paid in 2nd year:

Loan amount = $ 3,030

Principal repayment 1st year = 150.44 ( Refer working note )

Outstanding principal at 2nd year begining = $ 2,879.56

Interest for 2nd year = Outstanding balance at the begining of 2nd year * Interest rate

= $ 2,879.56 * 9%

= $ 259.16

Thus OPtion A is correct

Working Note:

( EAI - Interste paid for 1st year)

( $ 423.14 - ( $3,030 * 9% )

= $ 423.14 - $ 272.70

= $ 150.44

Tax saving on Interest apyment in First Year:

= Prinicipal * Interest Rate * Tax rate

= $ 3,030 * 9% * 14%

= $ 38.18

Thus OPtion B is Correct

Loan balance at the end of 2nd Year:

Outstanding Principal amount at the begining of 2nd year = $ 2,879.56 ( Computed above )

( - ) Prinpal payment for 2nd year ( Refer working note ) = 163.98

= $ 2,715.58

Thus Option C is correct

Working Note:

EAI - ( Outstaning bal at the begining of 2nd year * Interest rate )

= 423.14 - ( $ 2,789.56 * 9% )

= 163.98

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.