Question

Instructor-created question Question Help Suppose you are offered an investment opportunity that will pay you $4083.32 per month for 52 months. To make this investment, you must invest a total of $150000, but only $15000 is in cash at the start. You must borrow the rest of the investment ($135000) from Lo-Rate Bank at 16.7% APR, with monthly compounding, and the entire loan must be repaid at the end of the 52 months in one lump sum, which will total $276981.9. To be clear, absolutely NO repayment of the loan before the end of the 52 months is allowed. This investment is completely riskless and there are no taxes. What is the minimum APY you would need to be able to earn from reinvesting all the monthly income to make this a zero-NPV investment? (Percent with 2 decimals.)

Answer 1

Calculate the minimum APY as follows:

1 Particulars 2 Initial payment 3 Monthly amount receipt 4 Period in months 5 Last month payment 6 Monthly internal rate of return 7 Minimum APY to get zero NPV Amount $ 15,000.00 $ 4,083.32 52 $ 276,981.90 1.38% 17.88%

A Particulars Amount 2 Initial payment 15000 3 Monthly amount receipt 4083.32 4 Period in months 52 5 Last month payment 276981.9 6 Monthly internal rate of return =RATE(B4.-B3,B2,B5) 7 Minimum APY to get zero NPV =((1+B6)^12)-1