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# You are given the opportunity to invest in a project today that yields 25% per year compounded annually for 20 years. You will be able to withdraw all or part of your eamings at the end of each year.

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## You are given the opportunity to invest in a project today that yields 25% per year compounded annually for 20 years. You will be able to withdraw all or part of your eamings at the end of each year. You don't have any money to invest right now so you want to get a loan of $10,000 and you are faced with many options from the bank: Option 1: Bank will loan you the S10,000 today. The loan is due in 5 years, with a compound interest of 10% per year. Option 2: Bank will loan you the S10,000 today. The loan due is 10 years, with a compound interest of 20% per year. Option 3: The loan is divided into two payments, you will receive $5,000 today and S5,000 after 5 years. Each loan period is 5 years with a compound interest of 10% per year. Option 4: The loan is divided into two payments, you will receive $2,000 today and S8,000 after 5 years. Each loan period is 5 years with a compound interest of 20% per year. Option 5: The loan period is 10 years, with a compound interest of 1% per month. Assume you have no other source of income and you will have to declare bankruptey if the loan due date arrives without you having a sufficient fund from your investment to payback the bank a) Calculate in details the cash flow of your investment for each one of these five different loan structure options b) Is there an option from the five options where you would have to declare bankruptey? IF so, which ones? e) What is the best option for you, why? Rank them. You are given the opportunity to invest in a project today that yields 25% per year compounded annually for 20 years. You will be able to withdraw all or part of your eamings at the end of each year. You don't have any money to invest right now so you want to get a loan of $10,000 and you are faced with many options from the bank: Option 1: Bank will loan you the S10,000 today. The loan is due in 5 years, with a compound interest of 10% per year. Option 2: Bank will loan you the S10,000 today. The loan due is 10 years, with a compound interest of 20% per year. Option 3: The loan is divided into two payments, you will receive $5,000 today and S5,000 after 5 years. Each loan period is 5 years with a compound interest of 10% per year. Option 4: The loan is divided into two payments, you will receive $2,000 today and S8,000 after 5 years. Each loan period is 5 years with a compound interest of 20% per year. Option 5: The loan period is 10 years, with a compound interest of 1% per month. Assume you have no other source of income and you will have to declare bankruptey if the loan due date arrives without you having a sufficient fund from your investment to payback the bank a) Calculate in details the cash flow of your investment for each one of these five different loan structure options b) Is there an option from the five options where you would have to declare bankruptey? IF so, which ones? e) What is the best option for you, why? Rank them.

- Expert Answer

## PART A Cash Flow from Investment made in Security Amount Invested 10 000 Yield 25 annually Time 20 y View the full answer

**Related Book For**

## Managerial economics applications strategy and tactics

ISBN: 978-1439079232

12th Edition

Authors: James r. mcguigan, R. Charles Moyer, frederick h. deb harris

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