Your board of directors is thinking of taking out a loan of $500,000 for the corporporation. You have to pay $5,500 per month and $50,000 after 10 years. What annual Rate of Return would you hve to achieve on investments to make this a profitable venture?
To calculate the annual rate of return needed to make this loan a profitable venture, we need to consider the amount borrowed, the monthly payments, and the final payment after 10 years.
Let's break it down step by step:
1. Calculate the total amount of monthly payments over 10 years:
The monthly payment is $5,500, and there are 12 months in a year.
Therefore, the total monthly payments over 10 years would be: $5,500 * 12 * 10 = $660,000.
2. Calculate the total amount repaid over 10 years:
Along with the monthly payments, there is also a final payment of $50,000 after 10 years.
So, the total amount repaid over 10 years would be: $660,000 + $50,000 = $710,000.
3. Calculate the profit needed to make this venture profitable:
The loan amount is $500,000. Therefore, the profit needed would be the total amount repaid minus the loan amount:
$710,000 - $500,000 = $210,000.
4. Calculate the annual rate of return needed:
To find the annual rate of return, we need to consider the amount invested (loan amount) and the profit earned.
The formula to calculate the annual rate of return is:
Annual Rate of Return = (Profit / Amount Invested) * 100.
In this case, the profit is $210,000, and the amount invested is $500,000:
Annual Rate of Return = ($210,000 / $500,000) * 100 ≈ 42%.
Therefore, to make this loan a profitable venture, you would need to achieve an annual rate of return of approximately 42% on your investments.