Question

Carolina is considering a purchase of a new warehouse for its expanding parts division. Purchase will be financed with a $4,000,000 loan. The term of the loan: 15 years, amortizing (monthly payments), APR of 4.80%. The first payment is due one month from the day loan is taken. What will be the amount of each monthly payment? Alternatively, Carolina can use 20-year, monthly amortizing loan with 5.40% APR. How much more in total interest Carolina will pay if it goes with 20-year rather than 15-year loan? (Assume no pre-payments, refinancing, late payments etc.)

Answer 1

	Loan A	Loan B
Loan = principal	$4,000,000.00	$4,000,000.00
Term (Nper) = 15 x 12 months ; 20 x 12 months	180	240
Rate = 4.80%/12 ; 5.40%/12	0.40%	0.45%
Monthly Payments = PMT(rate,nper,-Principal)	$31,216.58	$27,290.06
Total Payments = Monthly payment x term (a)	$5,618,983.93	$6,549,615.27
Less: Principal (b)	-$4,000,000.00	-$4,000,000.00
Total Interest paid (a -b)	$1,618,983.93	$2,549,615.27
Total interest Carolina will pay if it goes with 20-year rather than 15-year loan ($2549615.27 -$1,618,983.93)	$930,631.33