Question

5.         Spider Development Corp. would like to purchase a piece of property for $3.5 million. The firm is able to make a down payment of 20% in cash and will finance the balance. The firm can afford to make monthly payments of $20,000 for 30 years. What is the highest annual percentage rate they can afford on this loan? (3 pts)

Answer 1

Given about Spider Development Corp.

Price of the property = $3.5 million

Down payment = 20% of property price

So, amount of loan = price*(1-down payment) = 3500000*(1-0.20) = $2800000

Afforded Monthly payment = $20000

Time period = 30 years

Using financial calculator to compute the monthly interest rate. Use following values:

PV = 2800000

PMT = -20000

N = 30*12 = 360

FV = 0

compute for I/Y, we get I/Y = 0.6433

Monthly rate = 0.6433%

So, annual percentage rate = 12*0.6433 = 7.72%

highest annual percentage rate they can afford on this loan is 7.72%