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1) The investor is looking at a $1.5 million parcel of land. She has two options:

a) She can put 20% down and employ 15 year loan rate found in WSJ.

b) She can put no money down and employ 30 year loan rate found in WSJ but she will have to pay private mortgage insurance (PMI) of 0.1% a month on the balance of the loan till she has 20% equity in the property. (Look up PMI on the internet if you’re not certain how this works.) The property will be grateful for in value at the rate of 0.2% a month.

Find out which option she must select. Suppose opportunity cost of her down payment is 0.25% a month. Setup cash flows in each case and then produce a column which nets them out. Think about how to determine when she no longer requires to pay monthly PMI fee. Compute the NPV by using the 15 year loan rate as discount rate.

2) Make a data table where column input is the difference in mortgage rates, go from 0% to 2% in increments of 0.1%. NPV is the other variable.

Make another data table where column input is PMI rate; go from 0% to 0.2% in increments of 0.01%. Again other variable is NPV.

Make another data table where column input is down payment amount; go from 0% to 20% in increments of 1%. Again other variable is NPV. describe the findings.

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Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914175

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