A small business received a five-year $1,000,000 loan at a subsidized rate of 3% per year.The firm will pay 3% annual interest payment each year and the principal at the end of five years.If market interest rates on similar loans are 6% per year,what is the NPV of the loan? (Ignore taxes.)
A)+$126,371
B)+$348,369
C)-$501,595
D)-$137,391

Question

Quizplus · Accepted Answer

The NPV of the loan is calculated by finding the present value of the interest savings and the principal repayment. The interest savings each year is the difference between the market rate (6%) and the subsidized rate (3%) on the $1,000,000 loan, which is $30,000. The present value of these savings over five years, plus the present value of the principal repayment at the end of five years, discounted at the market rate, results in an NPV of +$126,371.

A Small Business Received a Five-Year $1,000,000 Loan at a Subsidized