Alice owns a house, purchased five years ago. The original mortgage was for $240,000 with an interest rate of 8% and a term of 25 years. She paid 2 points. Interest rates have now fallen to 6% and a new mortgage can be obtained with 1 discount point. The new loans term would be 20 years. If the existing loan is paid off within 8 years of origination, a 1.5% prepayment penalty will be charged.

PART A- What is the initial investment for refinancing?

a. $5,536

b. $7,751

c. $9,966

d. $12,450

e. None of the above

PART B- What is the incremental monthly payment? a. $226.10

b. $241.97

c. $265.77

d. $287.45

e. None of the above

PART C- What is incremental loan balance at the end of the 5th year? a. $5,815

b. $2,995

c. $1,115

d. $995

e. None of the above

PART D- What is the NPV of refinancing the mortgage if Alice plans to sell the house 5 years from now and her required rate of return is 8%?

a. $7,044

b. $9,259

c. $11,474

d. $13,450

e. None of the above

PART E- How many months must Alice hold the new mortgage to recover her initial investment? a. 32.5

b. 36.2

c. 52.3

d. 65.3

e. None of the above