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Real World Project 2

Evaluating Loan Options for Flowers By Diana

Diana Bullard currently rents space for her small florist business. As her business continues to

grow, Diana has decided to purchase her own building. She has selected a site and now requires

financing. After meeting with several banks to discuss financing options for a mortgage, Diana

has the data she needs to analyze her options. She lists the purchase price of the building and the

different values for each of the loan variables together with the other data inputs in an Excel

workbook named Loan.xlsx. Her analysis must also take into account the following:

Down paymentThe amount of money Diana will pay at the time she purchases the

building. Provided is the percent of the building purchase price that will be required for a

down payment on each corresponding loan. The difference between the sale price and the

down payment is the loan valuethe face value of the loan.

PointsThe additional charges banks sometimes require when lending a mortgage. Banks

usually offer mortgage loans in a variety of interest rate and point combinations. Frequently,

loans with higher points have lower interest rates. One point equals 1% of the loan value, so

one point on a $7,500 loan is $75.

FeesThe additional amounts banks sometimes charge when lending a mortgage. These

amounts vary by bank and loan type. Typical charges include application fees, appraisal fees,

credit report fees, and so on.

Your task is to complete the Loan worksheet for Diana, using cell references whenever possible.

Write the formulas in cells G8 through K8 so that they can be copied down the column to

calculate values for each option. Write the formulas so they will automatically update if the

mortgage value changes. Loan options 17 are all compounded monthly.

Complete the following:

1. Open the workbook named Loan.xlsx. The file is attached to the RWP2 assignment link in

this learning module. Save the file name as FirstName_LastName_LoanAnalysis.xlsx.

2. In the Loan Value column, calculate the face value of this mortgage. The purchase price of

the building is in cell E3.

3. In the Monthly Payment column, calculate the monthly mortgage payment for this loan

amount based on the loan value you just calculated. Use the corresponding loan duration, and

nominal interest rate indicated. Assume that the loan is completely paid off at the end of this

duration. The number of compounding periods per year is in cell E4.

4. In the Actual Amount Borrowed column, calculate the actual amount Diana will borrow by

subtracting the points and fees from the loan value.

5. To take these fees into account, the lender is required by law to disclose the APR (the annual

percentage rate of interest) of the loan being charged. However, banks can calculate APR in

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different ways, including or excluding different fees. To calculate an actual annual interest

rate being charged on this loan (APR), use the actual amount borrowed (Step 4) as the

present value of the loan, the monthly payment (Step 3), and the corresponding loan duration.

6. In the Payment with Balloon column, use the nominal interest rate and loan value (from

column G) to determine the monthly loan payment if you altered the loan to include a

$20,000 balloon payment at the end of the loan.

7. The building seller has also offered Diana a private loan for 85% of the value of the building.

In return, Diana must pay $4,500 per month for the next 10 years. Determine the annual

interest rate being charged (cell E17). Inputs do not have to be explicitly listed elsewhere.

8. Diana is negotiating with the seller and is willing to pay $10,000 per quarter at 6 % interest

per year compounded quarterly. She will borrow everything but a 10% down payment.

9. Ten years ago, Diana invested $75,000 in a bank CD. The CD has earned 3.25% annual

interest compounded yearly. Determine (TRUE/FALSE) if Diana has sufficient funds from

this CD for the down payment for Option #1 (cell E19).

10. Diana has decided that she prefers a bank loan and, given cash flow issues, wants the loan

with the smallest payment. Highlight in light blue the cell in column H containing the

payment of the loan Diana should select.

11. Save and close the FirstName_LastName_LoanAnalysis.xlsx workbook.

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