Question

A foursome of entrepreneurial electrical engineering graduates has a plan to start a new solar power equipment company based on STE (solar thermal electric) technology. They have recently approached a group of investors with their idea and asked for a loan of $7.5 million. Within the agreement, the loan is to be repaid by allocating 70% of the company’s profits each year for the first 8 years to the investors. In the ninth year, the company will pay the balance remaining on the loan in cash. The company’s business plan indicates that they expect to make no profit for the first year, but in years 2 through 8, they anticipate profits to be $1.8 million per year. If the investors accept the deal at an interest rate of 12% per year, and the business plan works to perfection, what is the expected amount of the last loan payment (in year 9)?

Answer 1