Question1. Mr. Davidson plans to purchase a new house in October 2013. The sale price of the house is $436,000. He plans to pay 20% down payments as well as borrow additional 80% from Bank of America with a 15-year, 3.875% fixed-rate mortgage loan. He is anticipated to pay an equal MONTHLY payment which is starting from November 2013 for 15 years.
(1) Compute the required monthly mortgage payment for Mr. Davidson.
(2) Make the 2013 - 2015 amortization table (26 months) for Mr. Davidson.
(3) Mr. Davidson must make his 2013 tax filings in early 2014. Please evaluate the total mortgage interest payments that he can use for his 2013 tax deductions.
Question2. The MS Energy Corp. is planning a new investment project which is anticipated to yield cash inflows of $185,000 per year in Years 1 through 2, $220,000 per year in Years 3 through 6, and $198,000 in Years 7 through 9. This investment will cost company $790,000 today (initial outlay). We suppose that the firm's cost of capital is 6.8%.
(1) Draw a time line to show the cash flows of project.
(2) Evaluate the project’s payback period, profitability index (PI), net present value (NPV), and internal rate of return (IRR).
(3) Discuss whether the project must be taken.