Kwong Yuen Company is ready to buy an office unit. The company has $1,800,000 for

the (1) down payment, (2) costs related to bank loan, and (3) interior renovation cost.

Costs related to bank loan are estimated to be 6% of the loan value. Interior renovation

cost is estimated to be $880,000.

The company has an annual EBIT of $960,000 and the bank is willing to allow monthly

mortgage payment not higher than 40% of the monthly EBIT.

The interest rate on the 26-year instalment loan is 5.27% per year with monthly

compounding.

a) Identify the Effective Annual Rate of the instalment loan.

b) Find out how much the bank loan could be. (Take numbers in full during the process

of calculation. Show the final answer with two decimal places.)

c) Find out the price of the office unit the company could afford, taking the costs related

to bank loan and interior renovation cost into consideration.

Answer rating: 100% (QA)

Kwong Yuen Company Office Purchase Analysis a Effective Annual Rate EAR The loan has a stated intere... View the full answer