5. Your company is planning to borrow $1,000,000 on a six-year, 12%, annual paym

Question

5. Your company is planning to borrow $1,000,000 on a six-year, 12%, annual payment, fully amortized loan. Show all the values for an  amortization table for the first two years of this loan.

6. You are working as a rural appraiser. You have been asked to appraise  the value of a farm in rural Arizona. Very few farms have sold in the area in recent years so you cannot use the comparable sales approach for valuation purposes. So the income approach to valuation is the appropriate tool.   You have determined that the returns to land for this particular farm are $600 per acre. If the long-term interest rate for land financing is 6%, what   is the per acre value of the land?

Explanation / Answer

5).

let annual equal payment be PMT

amount borrowed = $1,000,000

time = 6 years

interest rate = 12%

1,000,000 = PMT*PVIFA(12,6)

here, PVIFA(r,n) = [1-(1+r)^-n]/r

1,000,000 = PMT*4.1114

PMT = 1,000,000/4.1114 = $2,43,226.15

6).

In income approach

valuation of land is done on the basis of Present value of all the future cash flow

value of land = PV of all future income

future expected incoome per year = $600

interest rate = 6%

value of land = 600/1.06+600/1.06^2+600/1.06^3............upto infinity

the above equation is a infinite geometric progression

sum of infinite GP of type a+ar+ar^2.......upto inifinity = a/(1-r) (where r <1)

so, above equation shrinks to

value of land = 600/.06 = $10,000

year interest rate beginning loan amount yearly payment Principal paid Interest paid loan amount left 1 0.12 1,000,000 243226.15 123226.15 120000 876,774 2 0.12 876,774 243226.15 138013.288 105212.862 738,761 3 0.12 738,761 243226.15 154574.8826 88651.2674 584,186 4 0.12 584,186 243226.15 173123.8685 70102.2815 411,062 5 0.12 411,062 243226.15 193898.7327 49327.4173 217,163 6 0.12 217,163 243226.15 217166.5806 26059.5694 -4

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

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