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Q1: [80 points] You are given the opportunity to invest in a project today that yields 25% per year compounded annually for 20 years. You
Q1: [80 points] You are given the opportunity to invest in a project today that yields 25% per year compounded annually for 20 years. You will be able to withdraw all or part of your earnings at the end of each year. You don't have any money to invest right now so you want to get a loan of $10,000 and you are faced with many options from the bank: Option 1: Bank will loan you the $10,000 today. The loan is due in 5 years, with a compound interest of 10% per year. Option 2: Bank will loan you the $10,000 today. The loan due is 10 years, with a compound interest of 20% per year. Option 3: The loan is divided into two payments, you will receive $5,000 today and $5,000 after 5 years. Each loan period is 5 years with a compound interest of 10% per year. Option 4: The loan is divided into two payments, you will receive $2,000 today and $8,000 after 5 years. Each loan period is 5 years with a compound interest of 20% per year. Option 5: The loan period is 10 years, with a compound interest of 1% per month. Assume you have no other source of income and you will have to declare bankruptcy if the loan due date arrives without you having a sufficient fund from your investment to payback the bank a) Calculate in details the cash flow of your investment for each one of these five different loan structure options b) Is there an option from the five options where you would have to declare bankruptcy? IF so, which ones? c) What is the best option for you, why? Rank them. 1
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