You Work For We Build The World Manufacturing Inc The Compan

You Work For We Build The World Manufacturing Inc The Company Has Dec

You work for We Build the World Manufacturing Inc. The company has decided to get a three-year loan to purchase a high-end lathe for $1 million. The current interest rate is 6%. Your task is to create a detailed loan amortization table in Microsoft Excel to calculate the monthly interest payments. The model should include sections for documentation explaining the purpose of the model, inputs for the loan parameters, and formula/output areas to perform the calculations. Additionally, the model must enable analysis of total interest paid over the loan period under the original interest rate and assess how a reduction to 3% interest rate impacts interest payments.

Paper For Above instruction

Introduction

Loan amortization modeling is a crucial financial tool used by organizations to understand the payment structures and total costs associated with borrowing. Specifically, for We Build the World Manufacturing Inc, acquiring a high-end lathe for $1 million necessitates a comprehensive analysis of loan repayments over three years at different interest rates. Developing an accurate Excel model allows the company to project monthly interest payments, total interest paid over the loan period, and compare the effects of interest rate fluctuations, informing strategic financial decisions.

Purpose of the Model

This model aims to provide a clear, detailed framework for calculating monthly interest payments on a three-year $1 million loan. By constructing an amortization schedule, the company can visualize how payments are divided between principal repayment and interest, understand the total interest expense over the loan lifespan, and assess how changes in interest rates influence the overall cost of financing. The model seeks to facilitate transparent financial planning and enable scenario analysis to support optimal decision-making.

Inputs

The model requires three key inputs:

  1. Annual Interest Rate: The yearly interest rate applied to the loan, initially set at 6%, with the ability to simulate a reduction to 3%.
  2. Number of Months: Total duration of the loan expressed in months, which in this case is 36 months (3 years).
  3. Loan Amount: The principal amount borrowed, set at $1,000,000.

These inputs should be editable to allow flexibility in scenario analysis and to understand the impact of different interest rates and terms.

Formula and Output Calculations

The model will utilize the standard amortization formula to compute monthly payments, which consist of principal and interest components. The key formulas include:

  • Monthly Payment: \( M = P \times \frac{r(1 + r)^n}{(1 + r)^n - 1} \)

where:

  • P = Loan principal = $1,000,000
  • r = Monthly interest rate = Annual rate / 12
  • n = Total number of payments = 36

Using this, the model calculates monthly payments, then breaks down each installment into interest paid and principal repaid. The interest payment for each month is derived by multiplying the remaining loan balance by the monthly interest rate.

The model will generate an amortization schedule showing month-by-month details, enabling calculation of total interest paid over 36 months under initial assumptions and after interest rate adjustments.

Analysis

By aggregating the interest portion of all payments, the model determines the total interest paid over three years at 6%. To evaluate the impact of a lowered interest rate to 3%, the model recalculates the monthly payment and interest payments using the new rate, illustrating the difference in total interest expense.

Results

Assuming the original interest rate of 6%, the total interest paid over three years can be obtained by summing all interest components from the amortization schedule. When interest rates drop to 3%, recalculating the amortization schedule demonstrates a significant reduction in total interest paid, highlighting the savings achievable through favorable interest rate movements.

Conclusion

This Excel model provides a comprehensive tool for We Build the World Manufacturing Inc to evaluate the financial implications of their loan for purchasing the lathe. It emphasizes the importance of interest rate environment on total borrowing costs and offers a practical framework for scenario analysis, aiding in strategic financial planning and risk management.

References

  • Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  • Damodaran, A. (2012). Investment Valuation: Techniques and Applications (3rd ed.). John Wiley & Sons.
  • Garman, M. B., & Forgue, R. E. (2017). Personal Finance (12th ed.). Cengage Learning.
  • Higgins, R. C. (2018). Analysis for Financial Management (11th ed.). McGraw-Hill Education.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2016). Essentials of Corporate Finance (9th ed.). McGraw-Hill Education.
  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Investopedia. (2023). Loan Amortization. https://www.investopedia.com/terms/l/loanamortization.asp
  • Statista. (2023). Average interest rates on business loans. https://www.statista.com
  • U.S. Small Business Administration. (2022). Types of Business Loans. https://www.sba.gov/funding-programs/loans
  • Bank of America. (2023). Understanding Interest Rates and Loans. https://www.bankofamerica.com

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