Time Value of Money Mini Case

Casino.com Corporation is building a $25 million office building in Las Vegas and is financing the construction at an 80 percent loan-to-value ratio, where the loan is in the amount of $20,000,000. This loan has a ten-year maturity, calls for monthly payments, and is contracted at an interest rate of 8 percent.

Assignment

Using the above information, answer the following questions.

1. What is the monthly payment?

2. How much of the first payment is interest?

3. How much of the first payment is principal?

4. Create an amortization schedule for this loan in Excel.

5. How much will Casino.com Corporation owe on this loan after making monthly payments for three years (the amount owed immediately after the thirty-sixth payment)? Hint: Calculate the amount by computing the present value of the remaining payments. Compare your answer with that obtained from your spreadsheet. The two should be the same, except for rounding.

6. Should this loan be refinanced after three years with a new seven-year 7 percent loan, if the cost to refinance is $250,000? To make this decision, calculate the new loan payments and then the present value of the difference in the loan payments.

7. What is the annual percentage rate on the original ten-year 8 percent loan?

8. What is the effective annual rate (EAR) on the original ten-year 8 percent loan?