FINANCIAL PROJECT
- In order to solve this problem the information is given regarding the total monthly loan payment ,the interest rate is given the outstanding loan balance is given and the time period is unknown. We can find that by using a financial calculator and total time period for the loan is 30 years.
- Total Time Period is 20 years in case 1 and 25 years in the case 2. Now assuming monthly compounding 20 years is equal to 240 months and 25 years is equal to 300 months. Since the interest rate is 5.75% annually the monthly rate is 0.479% and since five years have already passed so for case 1 20 years remain and for case 2 25 years remain.
For case 1 remaining months is equal to 240 months
Interest rate is 0.48%
Present value is 130,794.68 dollars
Using a Financial calculator the monthly payment comes out to 918 dollars
Under case 2 the payment is 822 dollars per month .
Extra payment per month= 918-822= 96 dollars
- No this would not be a reasonable strategy since you have less than 100 dollars left over to meet your monthly expenses and in case you adopt this strategy you will have nothing left over to cover your monthly expenses.
FINANCIAL PROJECT
Part 2
- For part 2 time remaining in the loan is 20 years which is equal to 240 months and there is an additional cost of 2000 if you refinance the loan . Hence the outstanding loan balance will be 132794.68 dollars. Now the unknown variable is interest and the current monthly payment is 822.68 dollars so use a number smaller than your current payment for this case. We use 822.67 dollars using a financial calculator yields 0.354588965% on a monthly basis.
- Answer is 4.25507578% on a yearly basis. Yes this is better option than the existing option.
References
Aswath.D.(2010). Applied Corporate Finance. George Hoffman.
Richard,A.B. Stewart ,C.M and Franklin,A.(2006).Principles of Corporate Finance. McGraw-Hill/Irwin.
Shapiro,A. (1988). International Corporate Finance. Ballinger Publishing Company.
