Using Present Values in Evaluating Loans Alabaster Corporation purchased a small office building, with a portion of the purchase price paid for through a 20-year mortgage loan of $200,000. The loan requires equal payments at the end of each year and carries a 10 percent annual interest rate. At the end of five years, Alabaster Corporation was approached by a local banker offering to refinance the remaining 15 years of the loan at an annual interest rate of 8 percent.

The company would need to pay the banker $10,000 to cover all costs associated with the refinancing.

a. What is the amount of the annual payment on the original loan?

b. What is the amount of the unpaid loan at the end of five years?

c. If Alabaster Corporation enters into a new loan agreement at 8 percent and borrows enough to pay off the old mortgage plus the refinancing costs, what is the amount of the annual payment on the new loan?

d. By what amount would the annual payment change if Alabaster Corporation refinances? Should the company refinance?