Question

QUESTION TWO – Cash Flow Valuation

As the General Manager of Glentonics you approached HFC Bank in order to obtain a term loan so that the company can buy a new production equipment. The bank offers your company a loan of $1.5m over a fifteen-year period at a rate of interest of 9.00 per cent, payable at the end of each month.

Before making the recommendation to go with HFC Bank, you decided to approach Bred Bank to obtain a quote on the loan facility. Bred Bank offers the company a fully drawn advance of $1.5m over a fifteen-year period at a rate of interest of 9.00 per cent, payable in advance at the beginning of each month.

Required:

1. How much will be your first month repayment at HFC Bank?
2. How much interest will be paid to HFC in the first month?
3. How much will be the loan balance with HFC at the end of the first month?
4. How much will be the monthly repayment at Bred Bank?
5. Which bank will you go with and why?

Answer 1

Computation of EMI by using excel tool:

Part a) First month repayment to HFC bank = EMI = $15,214

Part b) Interest paid to HFC bank =Outstanding loan * interest rate = $1,500,000*9%/12 = $11,250

Part c) Loan balance with HFC bank at the end of first month = Loan amount+Interest-Repayment = $1,500,000+$11,250-$15,214 = $ 1,496,036.00

Part d) Monthly repayment to bred bank = $15,100.74

Part e) Bred bank because it reduce overall interest payment to the extend of $10,000. It will be saving to the borrower.