Kwong Yuen Company is ready to buy an office unit. The company has $1,800,000 for the (1) down payment, (2) costs related to bank loan, and (3) interior renovation cost. Costs related to bank loan are estimated to be 6% of the loan value. Interior renovation cost is estimated to be $880,000. The company has an annual EBIT of $960,000 and the bank is willing to allow monthly mortgage payment not higher than 40% of the monthly EBIT. The interest rate on the 26-year instalment loan is 5.27% per year with monthly compounding. a) Identify the Effective Annual Rate of the instalment loan. b) Find out how much the bank loan could be. (Take numbers in full during the process of calculation. Show the final answer with two decimal places.) c) Find out the price of the office unit the company could afford, taking the costs related to bank loan and interior renovation cost into consideration.
Kwong Yuen Company is ready to buy an office unit. The company has $1,800,000 for the (1) down payment, (2) costs related to bank loan, and (3) interior renovation cost. Costs related to bank loan are estimated to be 6% of the loan value. Interior renovation cost is estimated to be $880,000. The company has an annual EBIT of $960,000 and the bank is willing to allow monthly mortgage payment not higher than 40% of the monthly EBIT. The interest rate on the 26-year instalment loan is 5.27% per year with monthly compounding. a) Identify the Effective Annual Rate of the instalment loan. b) Find out how much the bank loan could be. (Take numbers in full during the process of calculation. Show the final answer with two decimal places.) c) Find out the price of the office unit the company could afford, taking the costs related to bank loan and interior renovation cost into consideration.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 1
Kwong Yuen Company is ready to buy an office unit. The company has $1,800,000 for
the (1) down payment, (2) costs related to bank loan, and (3) interior renovation cost.
Costs related to bank loan are estimated to be 6% of the loan value. Interior renovation
cost is estimated to be $880,000.
The company has an annual EBIT of $960,000 and the bank is willing to allow monthly
mortgage payment not higher than 40% of the monthly EBIT.
The interest rate on the 26-year instalment loan is 5.27% per year with monthly
compounding.
a) Identify the Effective Annual Rate of the instalment loan.
b) Find out how much the bank loan could be. (Take numbers in full during the process
of calculation. Show the final answer with two decimal places.)
c) Find out the price of the office unit the company could afford, taking the costs related
to bank loan and interior renovation cost into consideration.
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