Question

44. The supportable loan for an investment project with 8% interest, 25-year amortization with monthly payments and DCR of 2, with an available Net Operating Income of $50,000,000 is 1S approximately: a. $340 mllion

Answer 1

DCR = Debt coverage ratio of loan = 2 , Net operating income = NOI = $50000000

We know that

DCR = NOI / Debt Service

2 = 50000000 / Debt service

Debt service = 50000000 / 2 = $25000000

Hence debt service = Total loan payment for a year = 25000000

Monthly debt service = Debt service for year / 12 = (25000000 / 12)

Period of loan = 25 years = 25 x 12 months = 300 months

Interest rate = 8% per year, monthly rate = interest rate per year / 12 = 8%/12

To find the supportable loan amount, we need to find the present value of monthly debt service for 25 years.

We can find the present value using pv function in excel

Formula to be used in excel: =pv(rate,nper,-pmt)

                                          =pv(8%/12,300,-25000000/12)

144 145 monthly debt service(pmt) 146 monthly Rate( rate) 147 No of months (nper) 148 Supportable loan (pv) 149 150 151 Calculating supportable loan amount 25000000/12 8%/12 300 PV( 8%/12,300,-25000000/1 PV(rate, nper, pmt, [fvl, [type])

Using pv function in excel ,we get supportable loan or present value of monthly debt service = 269926088.76 = (269926088.76 / 1000000) million = 269.992608876 million

which is approximately equal to $270 million.