CASE STUDY

Jenna, Jean and Kim started a flavoured olive oil business in their final year at Cambrian College under the name Pizazz. Costs included purchasing the oil, special equipment to infuse the flavours into the oil, bottling equipment and bottles, and other materials.

Startup Loan - The entrepreneurs financed the total of these costs with end-of-month payments through a loan from the bank at 2% compounded quarterly, amortized over 4 years. They began selling the flavoured olive oil to local restaurants, at the local farmers market, and online. Pizazz was the talk of the college campus and it was making a modest profit. After graduating, it was decided that they should expand their operations by renting a retail store in the city and adding 10 new flavours to their product line. They also hired an assistant to run the store, and a delivery person to handle personal orders. After two years of successfully managing Pizazz, they managed to save $33,100.00. At this time, they must decide if they should invest their savings in property (capital expenditures) or investment bonds.

Capital Expenditures - Their savings can be used as a down payment to purchase a warehouse property with manufacturing capabilities, and a delivery truck. The property and truck have a combined total cost of $159,000.00, of which $33,100.00 will be required as a down payment. The fixed interest rate on the mortgaged amount (for the property and truck) is 4.80% compounded quarterly for a term of 14 years.

Investment Bonds - A $36,000.00 bond is set to mature in 9 years. The bond rate is 3.50% payable semi-annually. The market rate is 4.80%, compounded quarterly (the same rate available on the mortgage). Jenna, Jean and Kim will only purchase this bond if they can afford it, and if they can get it at a discount, because they think the market rate will go down, making the bond more valuable in the future.

Answer the following questions related to these debts and bond:

Startup Loan

a. What were their monthly payments to settle this loan?

b. What was the principal balance outstanding on the loan after one year?

c. What will be the size of the final payment?

d. Construct a partial amortization schedule for this loan.

Mortgage on Property and Truck

e. What were their monthly payments to settle this mortgage?

f. What will be the size of the final payment?

g. Construct a partial amortization schedule for this loan. Feel free to use the template provided in the Excel Spreadsheet to help you.

h. How long would it take to settle this loan with regular monthly payments of exactly $2000 instead of the PMT value calculated in part (e)?

Investment Bonds

i. Calculate the purchase price of the bond if it is purchased today (9 years before maturity).

j. Do Jenna, Jean, and Kim have enough money to buy their bond using their $33,100.00 in savings? Should they purchase the bond? Why or why not?