ECON7740 Cost Benefit Analysis Tutorial 4
Exercises for loan calculations
The calculations in this tutorial relate to the determination of loan repayments to identify taxable
incomes for the private analysis.
Question 1
Suppose that a firm has borrowed $510,000 in the current year at 7.5% interest rate, with a
commitment to repay the loan (principal and interest) in equal annual instalments over the
following 7 years. Calculate:
a) The amount of the annual principal repayment
b) The stream of interest payments
c) The stream of total annual repayments
Question 2
Suppose a firm plans to finance a project by borrowing $2.5 million from the Bank at a real interest
rate of 8.5% per annum repayable in 15 years. Calculate
a) The amount of the annual principal repayment
b) The stream of interest payments
c) The stream of total annual repayments
Question 3
Suppose a firm decides to take out loan for $100,000. The rate of this loan is fixed at 5.5% per
annum and the loan term is 10 years with a balloon option of 25% (a lump sum payment at the end
of the loan). Calculate:
a) The present value of the balloon repayment
b) The stream of annual principal repayments
c) The stream of interest payments
d) The stream of total principal repayments
Question 4
Suppose a firm is considering a project with the following net benefit stream:
Year 0 1 2 3 4 5
Net Benefit (Market) -700 200 200 200 200 200
To undertake this project, the firm will open an overdraft account worth 50% of the initial cost in
year 0. Calculate:
a) The interest payments on the overdraft
b) The stream net private benefits after interest
c) The net present value of the private benefit.
Question 5
Suppose a firm borrows $12,000 in 3 equal disbursements (at years 0, 1, 2), at an interest rate of
7%, with a commitment to repay the loan (principal and interest) in equal annual instalments over
10 years. From a borrower’s perspective calculate:
a) The amount of the annual principal repayment.
b) The stream of interest payments which can be entered in the tax calculation of the
private benefit-cost analysis.
c) The stream of total annual repayments.
Hint: You need to first calculate the present value of the loan amount in year 0 and use it
to calculate principal & interest repayments.
Question 6
If a firms cash flow is:
Year 0 1 2 3 4 5 6 7 8 9 10
Cash flow -10000 -2000 1000 1000 1000 2000 2000 2000 3000 3000 3000
d) Calculate the annual equivalent repayment. Explore calculating the same cost using
different methods
Extra Practice Questions
Question 7
Suppose a firm plans to finance a project by borrowing $72,000 from the Bank at a real interest rate
of 3.5% per annum repayable in 20 years. Calculate
a) The amount of the annual principal repayment
b) The stream of interest payments
c) The stream of total annual repayments
Question 7
Suppose that a firm has borrowed $1000 in the current year at a 10% interest rate, with a
commitment to repay the loan (principal and interest) in equal annual instalments over the
following five years. Calculate:
a) The amount of the annual principal repayment.
b) The stream of interest payments which can be entered in the tax calculation of the
private benefit-cost analysis.
c) The stream of total annual repayments