Project Appraisal ECO 305 : Economics Questions and Answers

1) CEM Tutors zone Co. LTD wish to expand its production activities in the country. A project analyst

advised him to go for a loan that would be paid over a period of three years to be able to carry

out the expansion. CEM TUTORS ZONE's Banks indicated the year the loan was taken would not attract any

interest. Interest on the loan would only start accumulating after the first year. Due to these

beautiful terms, CEM TUTORSZONE took one hundred thousand Ghana Cedis with an interest rate of twelve

percent per annum.

a. Calculate the annual payment that must be made by CEMTUTORS ZONE Co. LTD over the three-

year period

b.Generate a loan repayment schedule for CEM TUTORS ZONE's bankers based on the terms of the loan

stated above.

                                                                   SOLUTION TO THE QUESTION

a. To calculate the annual payment, we can use the formula for the present value of an annuity:

PV = A * [(1 - (1 + r)^-n) / r]

Where PV is the loan amount, A is the annual payment, r is the annual interest rate, and n is the number of years over which payments will be made.

Plugging in the given values, we get:

100,000 = A * [(1 - (1 + 0.12)^-3) / 0.12]

Solving for A, we get:

A = 44,921.66

Therefore, CEM TUTORS ZONE Co. LTD must make annual payments of 44,921.66 Ghana Cedis over the three-year period to repay the loan.

b. To generate a loan repayment schedule, we can use the following table:

Year | Beginning Balance | Payment | Interest | Principal | Ending Balance

-----|------------------|---------|----------|-----------|---------------

1    | 100,000          | 44,921.66 | 0        | 44,921.66 | 55,078.34

2    | 55,078.34        | 44,921.66 | 6,609.40 | 38,312.26 | 16,766.08

3    | 16,766.08        | 44,921.66 | 2,011.53 | 42,910.13 | 0

In the first year, no interest is charged, so the entire payment of 44,921.66 goes towards reducing the principal. In the second and third years, interest is charged on the remaining balance, which decreases over time as more principal is repaid. The final payment of 42,910.13 Ghana Cedis fully repays the principal and any remaining interest charges.