New Warehouse Purchase Financing Analysis
What is the financing arrangement for the purchase of the new warehouse?
a) 30-year mortgage for 80 percent of the $4,500,000 purchase price
What is the monthly payment on the loan?
$27,500
What is the APR on the loan?
What is the EAR on the loan?
APR and EAR Calculation:
When purchasing a new warehouse, it is crucial to have a clear understanding of the financing arrangement in place. In this scenario, a 30-year mortgage has been secured for 80 percent of the $4,500,000 purchase price, resulting in a loan amount of $3,600,000.
APR Calculation:
The Annual Percentage Rate (APR) on the loan can be calculated by dividing the monthly payment by the loan amount, multiplying by 12 to get the annual payment, and then converting it into a percentage. For this specific loan:
- Annual payment = $27,500 x 12 = $330,000
- APR = ($330,000 / $3,600,000) x 100 = 9.17%
EAR Calculation:
The Effective Annual Rate (EAR) accounts for any compounding that occurs on the loan. In this case, with a 30-year mortgage, there are 30 compounding periods. Assuming a nominal interest rate of 9.17% for APR, the EAR can be calculated as follows:
- EAR = (1 + (0.0917 / 30))^30 - 1 = 9.64%