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Exam #3

Exam #3. Exam Date: April 3. FIN 3310 Review. PV – the value of money today; t=0 FV – the value of money at some point in the future Reversion – is a onetime sum to be received in the future Net Present Value – PV of all cash flow in AND all PV of cash flow out (initial investment).

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Exam #3

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  1. Exam #3 Exam Date: April 3

  2. FIN 3310 Review • PV – the value of money today; t=0 • FV – the value of money at some point in the future • Reversion – is a onetime sum to be received in the future • Net Present Value – PV of all cash flow in AND all PV of cash flow out (initial investment)

  3. What is IRR? (Internal Rate of Return)

  4. AKA yield; the rate that causes PV of cash received to exactly equal to the PV of cash flow at t=0 (all after tax) NPV=0 Two Parts: 1. after tax (cash flow) proceeds during operations 2. After tax (cash flow) proceeds during sale

  5. What happens to the amount of interest paid as you pay off your mortgage?

  6. The amount of interest paid decreases.

  7. What happens to the amount of principal paid as you make payments?

  8. The amount applied to the principal increases.

  9. What is the annual mortgage constant? How do you calculate it?

  10. It calculates payments on a fixed rate, conventional mortgage loan (annually) = 10 . 1-[1/(1+i)^n]

  11. How does the mortgage constant change if you are using monthly installments? What is the new formula?

  12. You would multiply the number of years and multiply the interest rate all by 12. = 10 . 1-[1/(1+i/12)^n*12]

  13. What is the loan balance (what does it include)?

  14. The loan balance is nothing more then the principal that you will owe; does not include interest

  15. What happens to the constant when you get closer to the term? Smaller or larger?

  16. It gets larger.

  17. 5 years ago you took out a loan of $100,000 @ 10% (i) for 30 years Solve: What are the annual payments?

  18. PV = 100,000n = 30i = 10PMT = 10,607.92

  19. 5 years ago you took out a loan of $100,000 @ 10% (i) for 30 years with monthly payments Solve: What are the monthly payments?

  20. PV = 100,000n = 30*12i = 10/12PMT = 877.57

  21. 5 years ago you took out a loan of $100,000 @ 10% (i) for 30 years with monthly payments; interest today at t-5 are 8% Solve: What are the monthly payments if you refinance what is your new monthly payments and total savings if you held the new loan to term?

  22. First find the new PV, then the new payment PMT = 877.57n = 25*12i = 10/12PV = 96,574 PV = 96,574 n = 25*12 i = 8/12 PMT = 745.37

  23. The total savings: 877.57 (original payment - 745.49 (new payment) 132.30 * 300 $39,660

  24. What is RROR?

  25. Discount rate; as i goes up or down PV does the opposite

  26. What is your expected yield if you invest $200,000 today (t=0) and receive $43,500 per year each year for 5 year? CF in arrears

  27. IRR = 17.36%

  28. Same, except: you expect to sell the property for $50,000 at t=10

  29. IRR = 18.66%

  30. Calculating NPV: You have $100,000 to invest today in a real estate project (t=0). You require a 15% IRR on the money you invested Two examples

  31. As an investor you would rather have cash flow now so you can invest more CF of $50,000 year for 5 year at a SP $450,000 at t=5 PV = 382,674 <100,000> NPV = 282,674 PV = 391,337.29 <100,000> NPV = 291,337.29 CF of $40,000 per year for 5 years at a SP of $500,000 at t=0

  32. What is the IRR on invest A? (Follow up question)

  33. PV = 100,00n = 5PMT = 40,000FV = 500,00 i = 63.693%

  34. What does i mean?

  35. The rate at which you discount cash flow over 5 years so that the cash flow will equal 100,000

  36. You need $60,000 loan you will amortize over 30 years, interest rate of 12% with monthly payments of principal and interest in order to make the loan the lender requires a 3% origination fee, upfront Questions following

  37. What is the cost (minus the origination fee)?

  38. 12%

  39. What is the monthly payment?

  40. PV = 60,000i = 12/12n = 30*12 PMT = 617.17

  41. What is the loan balance after the first month?

  42. 60,000*(.12/12) = 600617.17 – 600.00 = 17.17 17.17 is how much of the principal is paid the first month

  43. Loan balance after the 2nd month…

  44. 60,000-17.17 = 59,982.8359982.83 * (.12/12) = 599.83617.17 – 599.83 = 17.34 17.34 is the amount that is paid on the principal

  45. What is the amount paid if there is the required 3% origination fee?

  46. 60,000*.03 = 1800

  47. What is the net proceeds with the 3% origination fee?

  48. 60,000 – 1800 = 58,200 But still repay 60,000

  49. Using the prior information: what is the effective borrowing cost?

  50. PV = <58,200>FV = 0n = 30*12PMT = 617.17 i = 12.41% (i*12)

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