According to Dundar Mifflin financial analyst the company can only afford a

# According to dundar mifflin financial analyst the

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According to Dundar Mifflin financial analyst, the company can only afford a maximum yearly loan payment of \$1,000,000. The bank has offered Dundar Mifflin the following: Option 1: 3 year loan with an 8 percent interest rate Option 2: 4 year loan with a 10 percent interest rate Option 3: 5 year loan with a 12 percent interest rate Required: 1. Compute the loan payment under each option for year 1. PV = 3,500,000; r = 8% = 0.08; n = 3; PMT = ? PMT = PV * r/[1 – (1 + r) -n ] Option 1: = 3,500,000 * 0.08/[1 – (1 + 0.08) -3 ] = 280,000/[1 – (1.08) -3 ] PMT = \$1,358,117.30 Option 2: = 3,500,000 * 0.1/[1 – (1 + 0.1) -4 ] = 350,000/[1 – (1.1) -4 ] PMT = \$1,104,147.81 Option 3: = 3,500,000 * 0.12/[1 – (1 + 0.12) -5 ] = 420,000/[1 – (1.12) -5 ] PMT = \$970,934.06
2. Which option should the company choose? Based on the fact that Dundar Mifflin can only afford a maximum yearly loan payment of \$1,000,000. Option 2 would be the best fit for the company.