Question

In: Finance

Suppose a farm couple has the option to purchase 400 acres of land. Assume they are...

  1. Suppose a farm couple has the option to purchase 400 acres of land. Assume they are able to purchase the land for $4,000/acre. Assume a 25% down payment with the balance financed by a 30 year loan with a 7% interest rate and equal annual principal payments. What will their interest change in year 2 be?

    a.

    $40,000
    b.

    $84,000
    c.

    $78,400
    d.

    $81,200

Solutions

Expert Solution

Interest Change in Year 2

The total purchase price of the land

The total purchase price of the land = 400 Acres of land x $4,000/acre

= $16,00,000

The amount financed by loan

The amount financed by loan = Total purchase price – Down payment

= $16.00.000 – [$16,00,000 x 25%]

= $16,00,000 - $400,000

= $12,00,000

Equal annual principal payments

Equal annual principal payments = Loan amount / Loan period

= $12,00,000 / 30 Years

= $40,000 per year

Outstanding Loan amount at the beginning of Year 2

Outstanding Loan amount at the beginning of Year 2 = Loan amount at the beginning of Year 1 – Principal repaid

= $12,00,000 – [$16,00,000 / 30 years]

= $12,00,000 - $40,000

= $11,60,000

Interest Change in Year 2

Interest Change in Year 2 = Outstanding Loan amount at the beginning of Year 2 x Annual interest rate on the loan

= $11,60,000 x 7%

= $81,200

“Hence, the Interest Change in Year 2 would be $81,200”

jeff jeffy answered 2 years ago
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