Carolina is considering a purchase of a new warehouse for its expanding parts di
ID: 2616971 • Letter: C
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.)
Explanation / Answer
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