17A) Robert is considering the purchase of 80 acres of land South Texas for $3,2
ID: 2794612 • Letter: 1
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
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