Question

A manufacturing firm may decide to buy an adjustment property so that it can expand its warehouse. If finances through the seller, the property price is $300,000 with 30% down and the balance due in 5 anual payments is at 15%. The seller will accept 20% less if cash is paid. The firm does not have $240,000 in cash, but it can borrow this amount from a bank. What is the rate or return or IRR for the loan offered by the seller. Use linear interpolation.

Answer 1

Seller will accept either 240000 at present or 30% downpayment along with 5 annual payments at the rate of 15%

Loan amount = 70%*300000 = $ 210000

Equal payment = Loan*Interest/(1-(1+Interest)^-N) = 210000*15%/(1-(1+15%)^-5) = 62646.27

To calculate the IRR let it be R

total PV must be equal to (240000-90000) = 150000, of all the remaining cashflows

150000 = 62646.27/(1+R)^1+62646.27/(1+R)^2+62646.27/(1+R)^3+62646.27/(1+R)^4+62646.27/(1+R)^5

R = 30.90%

So IRR = 30.90%