BACKGROUND STORY:

You have joined a new office on 1st of January 2018. You have been hired as a Finance graduate as your company has many projects in hand to invest over next few years. The CEO of your company is desperately looking for the most efficient sources of financing for those projects. Your company wants rapid growth so they are not concerned about the size of the capital involved and the duration of the investment period, the company has set a project selection criteria solely based on the size of the instalment payment. The CEO believes, if the company's liquidity position permits to make regular instalments payments of the loans, it should invest in a project. You have also identified that the current market rate of return is 11% and you expect that to remain same for next few years.

In your first meeting with the CEO at 10 a.m. on 1 st of January 2018, he has provided you information on the following four sources of financing. He is expecting you to come back with your calculations after lunch but before he attends the Board meeting to finalise the investment decisions by the end of the same day.

Financing 1: On 1st of January 2018 you can borrow $20,000 from Bank A at 12% p.a. You have to pay fortnightly instalments for 5 years to pay off the loan. What is the instalment payment?

Financing 2: On 1st of January 2019 you can borrow $10,750 from Bank B at 11% p.a. You have to pay monthly instalments for 6 years to pay off the loan. What is the instalment payment?

Financing 3: On 1st of January 2021 you can borrow $33,650 from Bank C at 10% p.a. You have to pay fortnightly instalments for 10 years to pay off the loan. What is the instalment payment?

Financing 4: On 1st of January 2020 you can borrow $27,600 from Bank D at 10% p.a. You have to pay weekly instalments for 3 years to pay off the loan. What is the instalment payment?

Question 1(a). Show your calculations with full workings of instalment payment and complete the following table for your CEO.

Bank Instalment payments

A $

B $

C $

D $

Question (b). After reviewing your instalment payment calculations in requirement (a), the CEO said he is going to recommend in the Board meeting every project with instalment payment between $203 to $208, because it is the policy of the company not to differentiate between the instalment payments when such difference is very small. The CEO looked at you, and would like to know your opinions on this matter. What should be your opinions based on the Finance education that you have received at Monash?

Question (c). The CEO has asked you to recalculate the instalment payments with full workings if you did not agree with his opinions mentioned in requirement (b).

Question(d). The CEO has now revealed that the criteria of $203 to $208 is only applicable for monthly instalment payments. Which project would you recommend to your CEO so that he can correctly present in the upcoming Board meeting.