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2306AFE: Quantitative Methods for Business Finance and Economics

COMPUTING LAB EXERCISES

Practice questions- PART 1

[If the answer on the screen has more than 2 decimal places round to 2 decimal places]

QUESTION 1

Assume that G-bank is currently offering a special loan rate of 6.40% per annum, compounded monthly that is fixed for the 21 months but reverts back to their standard nominal rate of interest after that at 7.50% per annum compounded monthly. One individual has borrowed $195,000. The loan (and interest) is to be repaid over the next 19 years.  (Assume that the standard rate of interest remains unchanged for the term of the loan)  

A. Firstly prepare the loan repayment schedule, but ignore the special loan rate for now -use the standard nominal rate for the whole term of the loan

1. Calculate and then use the monthly repayment P that pays out the loan in 19 years. P= ____________

2. How much interest is paid (in dollars) in the first month? _______________

3. What is the principal remaining (loan balance) after 12 months? _______________

4. How much interest is paid in total? _______________

B. Now redo the loan repayment schedule, changing the interest rate to the special early rate for the first 21 months only, and the standard nominal rate after that – but still use the same monthly repayment amount, P that you calculated in part (A) for the total duration of the loan.

5. How much interest is paid (in dollars) in the first month?    _______________

and in the 22th month?      _______________

6. What is the principal remaining (loan balance) after 12 months?              _______________

 Adjust the last payment (which will be less than P) accordingly, so that the principal remaining is zero.

7. What is the last payment? _______________

8. In what month is the last payment made _______________

9. How much interest is paid in total? _______________

QUESTION 2

An investor considers investing money into one of two projects, project A and project B, which involve the following net cash flows:

A. Calculate Net Present Value of each given project at a discount rate of 10%

1. What is NPV of project A _____________________

2. What is NPV of project B _____________________

B. Calculate IRR of each given project

3. What is IRR of project A _____________________

4. What is IRR of project B _____________________

C. If you were that investor, which project would you choose to invest and why?

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