You have been recently employed by Valles Global Industries (VGI) and your supervisor has asked you to
Question:
You have been recently employed by Valles Global Industries (VGI) and your supervisor has asked you to evaluate various financing alternatives that are available to the company for a proposed plant expansion. This proposed expansion will cost $1,250,000 and 20 percent of the project will be financed with equity and the remainder will be financed with debt. Four separate lenders have offered 4 different loan options to VGI. Lender #1 has offered to finance the VGI expansion using the equal principal payment method at 5% interest for 10 years with a balloon payment at the end of the 5th year. Lender #2 has offered to finance the VGI expansion requiring interest-only payments for a term of 5 years and at an interest rate of 4%. Lender #3 has offered to finance the VGI expansion using the equal payment method with an interest rate of 4.75% to be amortized over 10 years with a balloon payment at the end of the 5th year. Lender #4 has offered to finance the VGI expansion with all due at maturity. The Lender #4 note will mature at the end of year 5 and carry a fixed interest rate of 3.70%. You are to assume that the first payment will be due at the end of 12 months following the close of the loan and that all subsequent payments are “end-of-year” (EOY). Your supervisor has requested that you evaluate each loan alternative.
College Accounting
ISBN: 978-1111528126
11th edition
Authors: Tracie Nobles, Cathy Scott, Douglas McQuaig, Patricia Bille