Question

An investment in the Mezzogiorno will receive a subsidized loan of $12 million from the Italian government. The loan bears an interest rate of 7% in contrast to a market rate of 10%. The loan principal must be paid back in 8 years. What is the present value of the interest subsidy?

a) $360,000
b) $1.92 million
c) $2.31 million
d) $870,000

Answer 1

b) $1.92 million

Step-by-step explanation:

year cash flow PVF@10% present value

0 1.000

1 0.36 0.909 0.33

2 0. 36 0.826 0.30

3 0. 36 0.751 0.27

4 0. 36 0.683 0.25

5 0. 36 0.621 0.22

6 0. 36 0.564 0.20

7 0. 36 0.513 0.18

8 0. 36 0.467 0.17

Net present value 1.92

Therefore, The present value of the interest subsidy is 1.92 million