You will be penalized if not all calculations are done with Excel formulas.

3%

2.25%

1.75%

2.5%

·     Calculate the payments for all three mortgages, i.e. calculate the initial cash inflow from the mortgage, the annual payments and ending balance after 5 years.

·     Calculate the interest rate you are effectively paying for each of the three mortgages. Which mortgage has the lowest effective rate?

·     Redo the investment analysis with the ARM you chose as having the lowest effect rate. What is the after-tax IRR and NPV for this mortgage option? Is this investment still worth undertaking? Should the investor choose the FRM or ARM?

Part 3: The investor is also approached by a lender, who is interested in providing a 30yr FRM with a 4.5% interest rate (monthly compounding) and LTV of 85%. However, the lender requires a share of 60 % in the before tax equity reversion (BTER). What is the after-tax IRR and NPV? Is this investment still worth undertaking?

Part 4: Overall and considering the FRM, ARM and SAM, which option would you recommend the investor and why?  (You can answer this in an easy-to-find space in your Excel file.)