Refinancing Decision Three years ago Max borrowed from a bank 60 000 euros for 5years to...

Refinancing Decision Three years ago Max borrowed from a bank 60 000 euros for 5years to start its own company. The interest rate for the bank loan was 6% and the repayment schedule is based on monthly annuity payments. Now, after three years have passed, the interest rates have declined and its economic situation has improved ( e.g Interest rate margin declined). Max now has an opportunity to refinance the remaining loan balance with a 4% interest rate . However, there is a catch. The fee for refinancing is 400 euros ( paid immediately). a) Find the initial monthly loan payment b) Find the loan balance after three years c) Now find the new monthly payment if loan is refinanced with 4% d) should Max refinance ? (hint: compare the refinancing fee with present value of savings)

Expert Solution

Max borrowed from a bank 60,000 euros for 5 years . The interest rate is 6% payable as monthly annuity payments.

Here as we can see after 3 years max would have paid 41,758.85 in monthly payments. If he would have continued the payment then he has to pay 69,598.09.

If max refinance @ 4% the remaining amount of 26,172.20 as shown the right side of figure , after 2 years he has to pay 27,276.62 which is 562.61 dollars lesser and if we add present value the refinance amount of 400 then we have net saving of 129.35 dollars

Q-1 As shown in the figure the Initial monthly payment is 1,159.97

Q-2 The loan balance after 3 years will be 26,172.20

Q-3 New monthly payment if the loan is refinanced is 1,136.53

Q-4 Max should refinance the loan as the net saving will be 129.35 dollars

jeff jeffy answered 2 months ago

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