Considering the following information, what is the NPV if the borrower refinances the loan? Expected holding period: 3 years, Current loan balance: $100,000; Current loan interest: 7%; Current loan mortgage payment: $898.33; Remaining term on current mortgage: 15 years; New loan interest: 5.5%; New loan mortgage payment: $817.08; New loan term: 15 years; Cost of refinancing: $5,000. Assume that the opportunity cost is the interest rate on the new loan (5.5%).

Question

Quizplus · Accepted Answer

Step 1: Calculate the total payments for the current loan:
Total payments = 12 months * 15 years * $898.33 = $161,499.60
Step 2: Calculate the total payments for the new loan:
Total payments = 12 months * 15 years * $817.08 = $147,074.40
Step 3: Calculate the present value of the current loan:
PV = $100,000 / (1 + 0.07/12)^(12*15) = $48,676.33
Step 4: Calculate the present value of the new loan:
PV = $147,074.40 / (1 + 0.055/12)^(12*3) = $125,836.57
Step 5: Calculate the net present value of refinancing:
NPV = PV of new loan - PV of old loan - refinancing costs
NPV = $125,836.57 - $48,676.33 - $5,000 = $72,160.24
Step 6: Compare the NPV with zero. Since the NPV is positive, the borrower should refinance.

Therefore, the answer is B.

Considering the Following Information, What Is the NPV If the Borrower