Question

AB InBev wishes to borrow $2.1 million for 8 years. The company LIME offers to lend the money at j2 = 9% if it is amortized semi-annually. Another company OCHO offers it at j2 = 7.6% only if the interest is paid semi-annually and the principal is returned at the end of 8 years. If you take OCHO’s offer a sinking fund is establish by semi-annual deposits at j2 = 3.9%. Which company should AB InBev take the offer from and how much can they save semi-annually with the better option?

Answer 1

Option 1: LIME’s amortizing loan.

Semi annual payments are $186,932.28   as follows:

Option 2: OCHO Offer.

Interest rate j2= 7.6%

Semi annual interest payment= Loan*Interest Rate/2 = $2,100,000*7.6%/2 = $79,800

Sinking fund payment (Semi annual)= $113,103.35 as follows:

Total semi annual payment under option 2= Interest on loan + singing fund payment

=$79,800 + $113,103.35 = $192,903.35

AB InBev shall accept the option 1 LIME loan since the semi annual payments under this option is less.

Amount saved by taking this option semi annually= $192,903.35 - $186,932.28 = $5,971.07