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6. (20 points) A company wants to borrow a loan to build a new production/warehouse facility. If the company offers to repay the loan with S60,000 in year I and the amounts ihcreasing by $10,000 each year after through year 5, how much can the company borrow now at an interest rate of 10o per year? Ans: $296,066

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Answer #1

The company offers to repay $60,000 in year 1 and increase by $10,000 through year 5. Therefore, the loan repayment profile will be as follows -

Year 1 = $60,000

Year 2 = $70,000

Year 3 = $80,000

Year 4 = $90,000

Year 5 = $100,000

Since the company wants to borrow at 10%, the present value of the repayment profile discounted at 10% will give us the amount the company can borrow now.

Present Value of Repayment Profile = [ 60000 / (1 + 0.1)1 ] + [ 70000 / (1 + 0.1)2 ] + [ 80000 / (1 + 0.1)3 ] + [ 90000 / (1 + 0.1)4 ] + [ 100000 / (1 + 0.1)5 ]

Present Value of Repayment Profile = 54545.45 + 57851.24 + 60105.18 + 61471.21 + 62092.13

Present Value of Repayment Profile = $296065.22

Therefore, the company can borrow $296065.22 given the conditions.

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