You have an opportunity to purchase investment real estate for $675,000. You nee

Question

You have an opportunity to purchase investment real estate for $675,000. You need to make a down payment of $70,000 (and you have enough in savings to make this down payment). The remaining purchase price would be borrowed at 4.25% annual rate of interest for 20 years with equal annual payments (that is, a payment once a year). Prepare a table that shows the annual payment, the amount of interest paid each year, and the remaining principal owed after each payment. HINTS -- This loan is a total of 20 payments so the principal owed after the 20th payment must be $0. Develop your calculations in a spreadsheet, then copy and paste the spreadsheet into your Word file as a table. Alternative scenario A: If you had an opportunity to make extra payments (that is, a pre-payment) of $14,600 after making the 9th and 13th scheduled annual payments, how many annual payments would you eliminate from the scheduled 20 payments? HINT – use your spreadsheet to answer this question. Alternative scenario B: Rather than two extra payments, you are able to pay an addition $3,200 each year, how many annual payments would you eliminate from the scheduled 20 payments? HINT – again, use your spreadsheet to answer this question. HINT -- in answering the questions for the alternative scenarios, you do NOT need to include additional tables. Simply state your answers in one or two professional sentences.

Explanation / Answer

Alternative A : If extra payments (that is, a pre-payment) of $14,600 after making the 9th and 13th scheduled annual payments (i.e. 10th and 14th installment), only no payment would be eliminated from the scheduled 20 payments and the last installment that is to be made at the end of 20th year would reduce to $4,441.

Alternative B :  If $3,200 is added to each year annual payment, 1 annual payments would be eliminated from the scheduled 20 payments and the last annual payment would be at the end of 19th year of $1,551.

Puchase Investment 675,000 Down Payment 70,000 Laon 605,000 Interest 4.25% Tenure 20 Year Annual Payment Interest Principle Remaining Principle due 0 605,000 1 45,508 25,713 19,796 585,204 2 45,508 24,871 20,637 564,568 3 45,508 23,994 21,514 543,054 4 45,508 23,080 22,428 520,626 5 45,508 22,127 23,381 497,244 6 45,508 21,133 24,375 472,869 7 45,508 20,097 25,411 447,458 8 45,508 19,017 26,491 420,967 9 45,508 17,891 27,617 393,350 10 45,508 16,717 28,791 364,559 11 45,508 15,494 30,014 334,545 12 45,508 14,218 31,290 303,255 13 45,508 12,888 32,620 270,636 14 45,508 11,502 34,006 236,630 15 45,508 10,057 35,451 201,179 16 45,508 8,550 36,958 164,221 17 45,508 6,979 38,529 125,692 18 45,508 5,342 40,166 85,526 19 45,508 3,635 41,873 43,653 20 45,508 1,855 43,653 0

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