Suppose you work at the help desk of Daffodil Bank. Your job is to help customers choosing the right financial product. Currently you are dealing with a customer who is seeking a loan to buy a car costing $45,000 inclusive of GST. The customer owns a small business and she wants to buy the vehicle for business use only. Daffodil currently offers the following two financing arrangements for this type of customers: i. ii. She can borrow the money as a consumer loan. All Daffodil consumer loans are fully amortizing loans. Interest rate is 10.25% per annum fixed for the term of the loan. Or ii. She can buy the car under a hire-purchase agreement since she is currently running a business. Under a hire-purchase agreement, interests are pre-computed at 10.25% per annum. Hire purchase loans are available for business purchases only. If the customer is buying the vehicle for her business, she is eligible to apply for this finance arrangement. Following terms and conditions apply to both loan arrangements: balloon payment is available up to 20% of the value of the vehicle; a once of application fee of $125 apply; term of the loan is up to 5 years. The customer wants to pay a down payment of 10% of the car value and balloon 10% of the loan size. She wants to pay off the loan in equal monthly payments over 5 years starting one month after the loan issue. She does not want to add up the application fee to the loan amount. The customer requires you to answer the following questions. A. How much she has to pay at the end of each month over the term of the loan under both loan arrangements (amortizing and pre-computed)? B. What is the total amount outstanding (total amount the customer owes to the bank) at the beginning of 30th period under both loan arrangements? C. What is the amount of interest payable with the 40th payment under both loan arrangements? D. The customer wants to accumulate the balloon amount by making an equal payment to a savings account at the end of each month over the term of the finance (5 years). If the savings account pays a fixed interest of 4.5% per annum over 5 years, how much she has to deposit to the savings account each month? Taking this deposit into account, what will be her total cash outflow (financial obligation) per month under both loan arrangements? E. According to the current taxation law, interests on hire-purchase loans are tax deductible. So if the customer buys the car for her business, she is eligible to claim tax refund for the interest paid on the hire purchase. Furthermore, if the vehicle is for business use, the customer is also eligible to claim back the GST (10%) paid on the purchase1 . Taking these two incentives into account, calculate the net financial cost (interests and fees net of tax deductions and GST claim) for the purchase of the vehicle under pre-computed finance arrangements at the time of borrowing. Assume that the customer purchases the vehicle at the beginning of a financial year while all tax deductions and GST are claimable at the end of the financial year; the customer’s tax rate is 30% and it will remain the same for the next 5 years and that the appropriate rate for the customer to discount future cash flows is 4.5% p.a. fixed for five years. F. Also calculate the financial cost under the consumer loan (amortizing) arrangements. Summarize your answer to questions A through F in a table. Show workings beneath the table. All supporting documents for example the Excel document must also be submitted if you solve the problem on Excel.
