Problem 4: Suppose that as a young small business entrepreneur you are eligible for a 3-year,...

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Problem 4: Suppose that as a young small business entrepreneur you are eligible for a 3-year, $1,000 loan at a government-subsidized below-market interest rate of 4% per year when the current market interest rate for this loan will be 10%. What would be the cash value of your savings if you take the government-subsidized loan, to be repaid in equal year-end payments over the loan term?

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Answer 1

Answer #1

Answer 4:

Loan amount = $1000

Loan term = 3 years

Subsidized rate of interest = 4%

To get annual installment payable at year end, we use PMT function of excel:

PMT (rate, nper, pv, fv, type)

PMT (4%, 3, -1000, 0, 0)

=$360.3485

To get cash savings we need to get PV of Yearly installment of $360.3485 with interest rate of 10%

PV (rate, nper, pmt, fv, type)

= PV(10%, 3, -360.3485, 0, 0)

= $896.13

Hence cash saving if you take the Government subsidized loan =$1,000 - $896.13 = $103.87

Cash value of saving if you take the Government subsidized loan = $103.87

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Answer 2

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