You have decided to purchase an industrial warehouse. The purchase price is $1 million and you

expect to hold the property for five years. You have narrowed your choice of debt financing

packages to the following two alternatives:

1)$700,000 loan, 6 percent interest rate, 30-year term, annual, interest-only payments (the annual payment

will not include any amortization of principal), and $50,000 in up-front financing costs.

2) $750,000 loan, 6 percent interest rate, 30-year term, annual, interest-only payments. No up-front

financing costs.

What is the difference in the present value of these two loan alternatives? Assume the appropriate

discount rate is 6 percent.

ANSWER

Present value of Option A is $1,050,000: initial equity ($300,000) + upfront financing fees ($50,000) + present value of interest payments ($578,123) + present value of loan principal upon repayment ($121,877).

Present value of Option B is $1,000,000: initial equity ($250,000) + present value of interest payments ($619,417) + present value of loan principal upon repayment ($130,583).

I don't understand how they got the answer... I need more detailed steps.