Mr & Mrs Smith, the owners of Hobart Yachts Ltd, have decided that it is time to acquire a manufacturing facility with an initial cost shown in row 8. They are now ready to meet with Christie, the loan officer from Westpac.

Christie begins the meeting by discussing a thirty-year mortgage. The loan would be repaid in equal monthly instalments. There would be no establishment costs for the loan. The annual interest rate of the thirty-year mortgage is provided in row 5. Christie says that the bank also offers an interest-only loan with a term of ten years and the annual interest rate is shown in row 3. The company would be responsible for making interest payments each month. At the end of the ten-year term, the company would repay the principal.

Mr & Mrs Smith are unsure of which loan they should choose, and they have asked you to answer the following questions:

a) What are the monthly payments for the thirty-year mortgage?

b) What are the monthly payments for the interest-only loan? c) Which option you would recommend to Mr & Mrs Smith, and are there any potential risks if the company takes this option?