Question

John is considering the purchase of 100 acres of land in East Texas for $2,500 per acre. A bank will loan him $2,000 per acre of land and the loan will be fully amortized over 12 years at 6%. The outstanding balance of the loan will be paid at the end of the 5th year. Assume that the marginal tax rate is 12% and the inflation rate is 4%. (Answer the following questions on a per acre basis) (i) Calculate the loan payment. a. $238 b. $120 c. $118 d. None of the answers are correct Enter Response Here: (ii) Calculate the interest paid in the first year. a. $112 b. $105 c. $120 d. None of the answers are correct Enter Response Here: (iii) Calculate the tax savings from interest payments in the second year. a. $14 b. $13 c. $12 d. None of the answers are correct Enter Response Here: (iv) Calculate the loan balance at the end of the first year. a. $1,755 b. $1,622 c. $1,881.45 d. None of the answers are correct Enter Response Here:

Answer 1

a)	Loan payment = 2000*0.06*1.06^5/(1.06^5-1) =	$           238.55
	Answer: Option [a] $238
b)	Interest paid in the 1st year = 2000*6% =	$           120.00
	Answer: Option [c] $120
c)	Principal at the beginning of the 2nd year = 2000+120-238.55 =	$       1,881.45
	Interest paid in the 2nd year = 188.45*6% =	$           112.89
	Tax savings at 12%	$             13.55
	Answer: Option [a] $14
d)	Loan balance at the end of the first year	$       1,881.45
	Answer: Option [c] $1881.45