Question

Imagine a farmer is going to purchase 50 acres of land, the land costs $250,000. The farmer is going to finance the purchase with $70,000 of equity and $180,000 of debt using a constant payment amortized loan. The 15 year loan will have monthly payments and carries an annual interest rate of 6%.   

Explain to the farmer how this purchase and the farmer’s financing choice will impact the farm’s annual balance sheet in the short term and long term (5-10 years out), the farm’s annual income statement in the short term and long term, and the farm’s cashflow(just focus on the short term). You can assume that farm land in this area generally increases in value at a low but steady rate. This is an open ended question although there are certain key points you should raise.

Answer 1

You can solve this using a Financial Calculator

Rate of Interest I/Y = 0.5% ( 6 / 12 ) per month

No. of Years N = 180 months ( 15*12)

PV = 180000 ( PV is the Present value of Debt )

CPT PMT = 1518.942 ( CPT stands for Compute )

Answer : The Farmer will have to make $ 1518.422 per month for 180 months i.e. 15 years to repay the debt of $ 180000

In long term and Short term the Balance Sheet will show an Asset i.e. the Land and Liability will show an Debt Obligation of $ 180000

Debt obligation will reduce eventually as the farmer makes his monthly installments

Land Value will not depreciate as Land is not subject to depreciation