menu
bartleby
search
close search
Hit Return to see all results

Assume that as a local government financial analyst you are asked to project the feasibility of a loan to a proposed public service venture for its start-up funding. The venture’s principals estimate that, at the end of 5 years, they will be able to pay back up to $800,000 from revenues accruing to the venture’s activities. Assuming that your organization’s current “average cost of capital” is 4.8% (the “discount rate”). Assuming monthly compounding, what is the maximum amount your government can commit to the venture for its start-up?

Question

Assume that as a local government financial analyst you are asked to project the feasibility of a loan to a proposed public service venture for its start-up funding. The venture’s principals estimate that, at the end of 5 years, they will be able to pay back up to $800,000 from revenues accruing to the venture’s activities. Assuming that your organization’s current “average cost of capital” is 4.8% (the “discount rate”). Assuming monthly compounding, what is the maximum amount your government can commit to the venture for its start-up?

check_circleAnswer
Step 1

Please recall the formula for compounding.

If P is the principal, R is the interest rate, N is the period and A is the compounded amount then the equation connecting all these variables is as shown on the whiteboard. 

fullscreen
Step 2

Let's now look at the question. The maximum amount that borrower can pay at the end of 5 year is $ 800,000. Cost of capital is 4.8%. Thecost of capital is compounded monthly.

Step 3

So we now have the inputs for out model ready,

A = 800,000;

Cost of capital is 4.8% per annum. Since compounding takes place every month we will have top figure out cost o...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Our solutions are written by experts, many with advanced degrees, and available 24/7

See Solution
Tagged in

Business

Finance

Related Finance Q&A

Find answers to questions asked by student like you

Show more Q&A add
question_answer

Q: On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7% bonds that pay interest semian...

A: Calculation of Amount of Bond Discount:The bond premium is $10,087 for six months. The bond premium ...

question_answer

Q: The potential loss incurred from purchasing a call option is finite, but the potential loss to the s...

A: Let's figure out the payoff to the seller  or writer of the call option at the time of expiration of...

question_answer

Q: A firm with sales of $500,000 has average inventory of $200,000. T he industry average for inventory...

A: Computation of inventory turnover:

question_answer

Q: Boeing Corporation or Northrop Grumman, for Goldman Sachs. You are anaggressive investment portfolio...

A: Click to see the answer

question_answer

Q: Whispering Pines Inc. is all-equity-financed. The expected rate of return on the company's shares is...

A: a.The opportunity cost of capital will still be 9.65%. Because the company is an equity financed com...

question_answer

Q: Case Study #3: Chapter 6 Business Analysis -  A business can be valued by capitalizing its earnings ...

A: You have asked a question with five sub parts. I will address the first three sub parts. Please post...

question_answer

Q: A store will give you a 4.00% discount on the cost of your purchase if you pay cash today. Otherwise...

A: Let's assume the cost of purchase is C. On immediate payment,Discount = 4%Hence, the discounted cost...

question_answer

Q: The prices of a certain security follow a geometric Brownian motion with parameters mu=.12 and sigma...

A: Let's pull together all the variables of Black Scholes Model:S = Current stock price = 40K = Strike ...

question_answer

Q: The principal P is borrowed at a simple interest rate r for a period of time t. Find the simple inte...

A: If P is the principal amount, r is the simple interest rate per annum expressed in %age and t is the...

Sorry about that. What wasn’t helpful?