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What are the payments for the interest-only loan

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Reference no: EM132851037

Question - Mark Kwan and Todd Jovan, the owners of Cains Yachts Ltd, were impressed by the work you had done on financial analysis. Using your analysis, and looking at the demand for yachts, they have decided that it is time to acquire a bigger manufacturing facility with a cost of $25 million. Mark and Todd are now ready to meet with Christie Vaughan, the loan officer from Westpac.

Christie begins the meeting by discussing a thirty-year mortgage. The loan would be repaid in equal monthly instalments. There would be no establishment costs for the loan. Christie states that the annual interest rate of the loan would be 6.8%. Todd asks if a shorter mortgage loan is available. Christie says that the bank does have a twenty-year mortgage available at the same annual interest rate.

Christie says that the bank also offers an interest-only loan with a term of ten years and an annual interest rate of 3.9%. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the ten-year term, the company would repay the $25 million principal.

Mark and Todd are unsure of which loan they should choose, and they have asked you to answer the following questions:

(a) What are the monthly payments for a thirty-year mortgage?

(b) What are the monthly payments for a twenty-year mortgage?

(c) What are the payments for the interest-only loan?

(d) Which mortgage option would you recommend to the company? Are there any potential risks if the company takes this option?

Reference no: EM132851037

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