Assignment No.3: Extending the corporation Mohamed and Abdullah are the owners of ConstructionACE Inc. Both are satisfied by the work Ahmed had done on financial planning. Using Ahmed's predictions, the decided to acquire bigger facility for their corporation. Mohamed and Abdullah have spotted a suitable building and they believe that they can buy it for 29 million AED. Now, the three of them are about to contact Mostafa, the loan manager for the ADCB BANK. They arranged a meeting to discuss the mortgage options available in order to finance the new facility. Mostafa proposed a 25-year mortgage. The loan would be repaid in equal monthly installments. Mostafa also stated that the APR of the loan would be 5.95 %. Abdullah asked if a shorter mortgage loan is available. Mostafa replied that the bank does have a 20-year mortgage available at the same APR. Mohamed inquired about a "smart loan" with another bank when he bought his house. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly one half of the normal monthly mortgage payment. Mostafa answered that the bank does have smart loans. The APR in this case would be the same as the APR of the traditional loan. Mohamed replied to Mostafa that this is the best option available since it saves interest payments. Mostafa agrees with Mohamed but then he proposed a bullet loan, or balloon payment, would result in the highest interest savings. Mostafa then started explaining to Abdullah the bullet loan. The monthly payment of a bullet loan would be calculated using a 25-year traditional mortgage. There would be a 5-year bullet. This means that the company would make the mortgage payments for the traditional 25-year mortgage for the first five years, but immediately after the company makes the 60 payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Ahmed in turn asked how the bullet payment is calculated. Mostafa replied that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 20 years of mortgage payments for the 25-year mortgage. Abdullah on the other hand, has heard of an interest-only loan and asked if this kind of loan was available and what terms would be. Mostafa said that the bank offers an interest-only loan with a term of 8 years and an APR of 3.1 %. He goes on to further explain the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 8-year term, the company would repay the 29 million. However, the company can make principal payments any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment. Mohamed and Abdullah are satisfied with Mostafa's answers, but they are still not sure of which option they should follow. They have asked Ahmed to answer the following questions to help them choose the correct mortgage. QUESTIONS 1) what are the monthly payments for a 25-year traditional mortgage? What are the payments for a 20-year traditional mortgage? (20%) 2) How long would it take for ConstructionACE to pay off the smart loan assuming 25-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save? (20%) 3) Assume ConstructionACE takes out a bullet loan under the terms above. What are the payments on the loan? (20%) 4) What are the payments for the interest-only loan? (20%) 5) Which mortgage is the best for the company? Are there any potential risks in this action? (20%) QUESTIONS 1) what are the monthly payments for a 25-year traditional mortgage? What are the payments for a 20-year traditional mortgage? (20%) 2) How long would it take for ConstructionACE to pay off the smart loan assuming 25-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save? (20%) 3) Assume Construction ACE takes out a bullet loan under the terms above. What are the payments on the loan? (20%) 4) What are the payments for the interest-only loan? (20%) 5) Which mortgage is the best for the company? Are there any potential risks in this action? (20%) Required: First read Chapter 4 and 5 carefully. Second, read the text in this case study and then answer the questions. Prepare your answers in a Word and EXCEL files (both) and upload it to Blackboard under Assignments/Exercises link. Word file will contain the explanation and the solutions of the questions and the excel file the calculations analytically. In the excel file, you need to prepare the calculations using either functions or algorithms: I.e.: =1200+800 (=2000). OR: = Al + A2 (where these cells contain 1200 and 800 respectively); any of the two methods will be considered as a correct answer. Assignment No.3: Extending the corporation Mohamed and Abdullah are the owners of ConstructionACE Inc. Both are satisfied by the work Ahmed had done on financial planning. Using Ahmed's predictions, the decided to acquire bigger facility for their corporation. Mohamed and Abdullah have spotted a suitable building and they believe that they can buy it for 29 million AED. Now, the three of them are about to contact Mostafa, the loan manager for the ADCB BANK. They arranged a meeting to discuss the mortgage options available in order to finance the new facility. Mostafa proposed a 25-year mortgage. The loan would be repaid in equal monthly installments. Mostafa also stated that the APR of the loan would be 5.95 %. Abdullah asked if a shorter mortgage loan is available. Mostafa replied that the bank does have a 20-year mortgage available at the same APR. Mohamed inquired about a "smart loan" with another bank when he bought his house. A smart loan works as follows: Every two weeks a mortgage payment is made that is exactly one half of the normal monthly mortgage payment. Mostafa answered that the bank does have smart loans. The APR in this case would be the same as the APR of the traditional loan. Mohamed replied to Mostafa that this is the best option available since it saves interest payments. Mostafa agrees with Mohamed but then he proposed a bullet loan, or balloon payment, would result in the highest interest savings. Mostafa then started explaining to Abdullah the bullet loan. The monthly payment of a bullet loan would be calculated using a 25-year traditional mortgage. There would be a 5-year bullet. This means that the company would make the mortgage payments for the traditional 25-year mortgage for the first five years, but immediately after the company makes the 60 payment, the bullet payment would be due. The bullet payment is the remaining principal of the loan. Ahmed in turn asked how the bullet payment is calculated. Mostafa replied that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 20 years of mortgage payments for the 25-year mortgage. Abdullah on the other hand, has heard of an interest-only loan and asked if this kind of loan was available and what terms would be. Mostafa said that the bank offers an interest-only loan with a term of 8 years and an APR of 3.1 %. He goes on to further explain the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 8-year term, the company would repay the 29 million. However, the company can make principal payments any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment. Mohamed and Abdullah are satisfied with Mostafa's answers, but they are still not sure of which option they should follow. They have asked Ahmed to answer the following questions to help them choose the correct mortgage. QUESTIONS 1) what are the monthly payments for a 25-year traditional mortgage? What are the payments for a 20-year traditional mortgage? (20%) 2) How long would it take for ConstructionACE to pay off the smart loan assuming 25-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save? (20%) 3) Assume ConstructionACE takes out a bullet loan under the terms above. What are the payments on the loan? (20%) 4) What are the payments for the interest-only loan? (20%) 5) Which mortgage is the best for the company? Are there any potential risks in this action? (20%) QUESTIONS 1) what are the monthly payments for a 25-year traditional mortgage? What are the payments for a 20-year traditional mortgage? (20%) 2) How long would it take for ConstructionACE to pay off the smart loan assuming 25-year traditional mortgage payments? Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save? (20%) 3) Assume Construction ACE takes out a bullet loan under the terms above. What are the payments on the loan? (20%) 4) What are the payments for the interest-only loan? (20%) 5) Which mortgage is the best for the company? Are there any potential risks in this action? (20%) Required: First read Chapter 4 and 5 carefully. Second, read the text in this case study and then answer the questions. Prepare your answers in a Word and EXCEL files (both) and upload it to Blackboard under Assignments/Exercises link. Word file will contain the explanation and the solutions of the questions and the excel file the calculations analytically. In the excel file, you need to prepare the calculations using either functions or algorithms: I.e.: =1200+800 (=2000). OR: = Al + A2 (where these cells contain 1200 and 800 respectively); any of the two methods will be considered as a correct