Suppose a farm couple has the option to purchase 400 acres of land. Assume they are...
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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 1 be?
a. $84,000
b. $40,000
c. $78,400
d. $12,000
Homework Answers
Interest Change in Year 1
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
Interest Change in Year 1
Interest Change in Year 1 = Outstanding Loan amount at the beginning of Year x Annual interest rate on the loan
= $12,00,000 x 7%
= $84,000
“Hence, the Interest Change in Year 1 would be $84,000”
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