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    Homework Assignment

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    canhiz
    The Browns have two options to prepay their $30,000, 30-year mortgage after making 20 annual payments of 3% interest: 1) Prepay at a 30% discount, but rates are now 12% 2) Replace the mortgage with a 5-year, zero-interest loan for the remaining principal, which the banker claims would save them over $2,000 in interest.

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    Homework Assignment

    Uploaded by

    canhiz
    218 views2 pages
    The Browns have two options to prepay their $30,000, 30-year mortgage after making 20 annual payments of 3% interest: 1) Prepay at a 30% discount, but rates are now 12% 2) Replace the mortgage with a 5-year, zero-interest loan for the remaining principal, which the banker claims would save them over $2,000 in interest.

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    Assignment -Econ

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    The Browns have two options to prepay their $30,000, 30-year mortgage after making 20 annual payments of 3% interest: 1) Prepay at a 30% discount, but rates are now 12% 2) Replace the mortgage with a 5-year, zero-interest loan for the remaining principal, which the banker claims would save them over $2,000 in interest.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    218 views2 pages

    Homework Assignment

    Uploaded by

    canhiz
    The Browns have two options to prepay their $30,000, 30-year mortgage after making 20 annual payments of 3% interest: 1) Prepay at a 30% discount, but rates are now 12% 2) Replace the mortgage with a 5-year, zero-interest loan for the remaining principal, which the banker claims would save them over $2,000 in interest.

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    © All Rights Reserved
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    of 2

    INDIVIDUAL HOMEWORK ASSIGNMENT

    ETM512.02

    Due May 16th, 2015


    1. Mr. and Mrs. Brown purchased a $35,000 house 20 years ago. They took a 30-year mortgage for
    $30,000 at a 3% annual interest rate. Their bank has recently offered the couple two alternatives by
    which they could prepay their mortgage. The Browns have just made their 20th annual payment. Which
    of the following two alternatives, if either, should the Browns pursue?
    a. The couple could prepay their mortgage at a 30% discount from the current principal outstanding
    while current 10-year mortgage rates are 12%. Assume payments are made at the end of each year
    (instead of monthly). (You should compare the actual single payment the couple needs to make to the
    bank with the PV of the remaining payments) (10 points)
    b. The couple could replace their existing mortgage with a five-year zero-interest loan, in the amount of
    their current mortgages principal outstanding. This new loan is to be repaid in 5 equal annual payments.
    The banker pointed out that this option would save them well over $2,000 in interest.(You should
    follow a similar strategy to part a) (10 points)
    2. Pack-n-Go Industries is considering in investing in a new packaging system that is expected to last for
    5 years. An initial amount of $10million is required to buy a new conveyor belt. The belt will be
    depreciated to zero over the 5 years. The firm can sell the belt for $2 million at t = 5. The requirement in
    WC, projected revenues and expenses are provided in the next table. The company is in the 35% tax
    bracket. What is the NPV of this new system at 12% discount rate? (20 points)

    3. Calculate the beta of General Electric (GE) using data from Yahoo Finance (use weekly returns for the
    past 3 years and SP500 as the market) (Hint: The excel formula for estimation is linest) (20 points)
    4. Suppose you own a stand that sells hot dogs, peanuts, popcorn, and drinks. You have three years left
    on your contract, and you do not expect it to be renewed. Long lines limit sales and profits. You have
    developed four different proposals to reduce the lines and increase profits.
    The first proposal is to renovate by adding another window. The second is to update the equipment at
    the existing windows. These two renovation projects are not mutually exclusive; you could take both
    projects. The third and fourth proposals involve abandoning the existing stand. The third proposal is to
    build a new stand. The fourth proposal is to rent a larger stand in the ball park. This option would
    involve $1,000 an up-front investment for new signs and equipment installation; the incremental cash
    flows shown in later years are net of lease payments.

    You have decided that a 15% discount rate is appropriate for this type of investment. The incremental
    cash flows associated with each of the proposals are:

    Project
    Add a New Window
    Update Existing Equipment
    Build a New Stand
    Rent a Larger Stand

    Incremental Cash Flows


    Investment
    Year 1
    -$75,000
    44,000
    -50,000
    23,000
    -125,000
    70,000
    -1,000
    12,000

    Year 2
    44,000
    23,000
    70,000
    13,000

    Year 3
    44,000
    23,000
    70,000
    14,000

    Using the internal rate of return rule (IRR), which proposal(s) do you recommend? (15 points)
    Using the net present values rule (NPV), which proposal(s) do you recommend? (15 points)
    How do you explain any differences between the IRR and NPV decisions? Which rule is better? (10
    points)

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