  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?

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.

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

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 