Question

An investment in the Mezzogiorno will receive a subsidized loan of $12 million from the Italian government. The loan bears an interest rate of 7% in contrast to a market rate of 10%. The loan principal must be paid back in 8 years. What is the present value of the interest subsidy?

a) $360,000
b) $1.92 million
c) $2.31 million
d) $870,000

Answer 1

Answer:

b) $1.92 million  

Explanation:

year               cash flow        PVF@10%           present value

0                                            1.000                                        

1                      0.36                0.909                   0.33

2                     0. 36               0.826                    0.30

3                     0. 36               0.751                      0.27

4                     0. 36                0.683                     0.25

5                     0. 36                0.621                      0.22

6                     0. 36                0.564                      0.20

7                     0. 36                0.513                       0.18

8                     0. 36                0.467                       0.17

Net present value                                                  1.92

Therefore, The present value of the interest subsidy is 1.92 million