You currently owe a payment of $$200,000$ on a loan. You operate a property with net operating income of $$150,000$ per year.

In one year, you will owe a terminal principal and interest payment of $$2,200,000.$ You are certain that NOI will still be $$150,000$ next year, but the property will be worth $$1\mathrm{.}8$ million with $80\%$ probability and $$2\mathrm{.}3$ million with $20\%$ probability. Your discount rate is $5\%$ per year. By your calculation, the recourse, reputation, ethical, and future credit costs of default sum to $$75,000.$ If you do so now, there will be zero payoff and a $$75,000$ default cost.

If you pay now and default next year, you will earn $$150,000$ but pay $$200,000$ immediately, and then next year recognize $$75,000$ in $($then$)$ present value of default cost $($you do not receive next year's NOI if you default$).$

If you both do not default this year and do not default next year, you will immediately lose $$50,000(+$$$150,000-$$$200,000),$ then collect next year's NOI and resale value, but also pay off the $$2,200,000$ loan payment.

You can observe next year's property value before deciding whether to default next year, but do not have that information for this year's default decision.

True or false: you should make your current payment, as opposed to defaulting on the loan.

Group of answer choices

True

False