Cyberproblem: Prepayment vs. Investment Analysis.
In managing one’s own finances, as well as those of a business, there are numerous decision situations where applications of "Time Value of Money" (TVM) concepts and methods help one assess the financial consequences of alternative courses of action. One such situation is the decision to prepay part or all of one’s mortgage or loan balance by making extra periodic principal payments. As one makes extra principal payments, the loan balance is reduced faster. This means you pay less interest over the life of the loan and the loan will be repaid earlier (i.e. fewer payments). For example, a person might decide to pay .00 per month extra (i.e. if their mortgage payment was 0 per month, they might pay 0 each month, extra) on a mortgage loan. The extra payment of would be applied each month to reduce the principal balance. However, there are important factors to consider before making this decision. For example, if the mortgage loan is on the person’s primary residence, the interest on the loan may be tax deductible. This reduces the net, after-tax cost of the loan.
To consider the financial consequences of this decision, you can search the Internet for free financial calculators, including some that will assist with a prepayment versus investment scenario analysis. Before using a Web site, you will need to amortize the loan you will use as input data for the analysis.

Suppose you purchase a home for 0,000 and obtain a 90% mortgage loan, 30-year maturity, at a fixed annual interest rate of 8.0%, with deferred monthly payments. What is the monthly payment for principal and interest (P&I) on this loan?
The loan amount is 0,000 x 0.90 = 5,000 The calculator keystrokes follow. PV = – 5,000; N = 360 (30yrs x 12 per year); I = 8.0%/12 = 0.6667; FV = 0 (the loan will be paid off at maturity); SOLVE for PMT = 0.62 Note: If you enter the interest rate at 0.6667% per month you get the payment above. If you carry full precision on your calculator, the PMT = 0.62.
The data you will need for the prepayment scenario include the following.
Loan Balance: 5000
Current Payment: 0.62
Additional Payment: .00
Loan Interest Rate: 8.0%
Loan Interest Deductibility: YES
Investment Rate Return: 6.00%*
Tax Bracket: 30.00%
Investment Type: After-Tax
*The Investment rate return is your opportunity cost estimate. It is the annual rate you think you can earn on the extra principal payment if you did not make extra principal payments on your mortgage but instead, invested it.
Now visit the website http://www.mortgage-calc.com/mortgage/index.html, and select Prepayment vs. Investment.
a.After 12 months of making extra payments, what will be the loan balance?
b.After 12 months of making the regular payment and investing the , what will be the loan balance?
c.Under the regular payment and investing option, excluding the tax due on the interest earned, what is the investment balance after 12 months?
d.Compare the scenarios of investment versus prepayment by examining the 60th payment, which occurs at the end of the fifth year. What is the difference between the (a) interest portion of that payment, (b) tax deduction for interest, and (c) principal balance? Finally, how much is in the investment account?
e.(a) How long does it take to repay the entire loan under the prepayment option? (b) What is the total interest paid over the life of the loan?
f.Compare the total interest paid under each scenario? How much less in interest do you pay under the prepayment option?
g.If you make an extra .00 principal payment per month, what are the opportunity cost considerations?
h.What are the relevant cash flows to consider in this decision? For example, do you consider the tax implications and if so, then how?
i.Do you go out to lunch too often? Go to this site http://marketplacemoney.publicradio.org/toolbox/calculators/LunchSaver.htmland use the Lunch Savings Calculator to see how much money you can save by not going out to lunch. If this site does not function for you, search the Internet for a similar calculator. Suppose you usually spend .00 a day when you go out to lunch, when bringing your lunch to school/work would only cost you about .00 a day. Since there are approximately 20 weekdays in a month, enter that value for the days eaten per month. How much money would you save after 15 years if you could earn a 10% yield on the money you save? If this site does not function for you, search the Internet for a similar calculator. If you do use a different site, provide the URL to your instructor.

j.Suppose your investment account earns an average annual return of 9%, and the average rate of inflation is 3%. Go to this site http://www.nwcu.com/Web_Tools_and_Links/Calculators/Reitrement_Planner/ and use the Save a Million Calculator to see how long it would take to have a million dollars. State your answer in total years. Imagine that you started with an initial investment of ,000 and made monthly 0 contributions (assume that your deposits are inflated at the average rate of inflation)? If this site does not function for you, search the Internet for a similar calculator. If you do use a different site, provide the URL to your instructor.
*Adapted from:

Brigham, E. F. & Houston, J. F. Chapter 6 Cyberproblem: Prepayment vs. Investment Analysis in Fundamentals of financial management (10th ed.). Retrieved March 10, 2006, from http://www.swlearning.com/finance/brigham/ffm10e/ffm10e.html

I have to be honest, though, while Pres. Obama adopted the meat of McCain’s proposal, he sure made it less inclusive and more regressive. Being some DINO Mr Obama proves to us once again.

John McCain proposed 00 tax credit to EVERYONE for purchasing health care.
If you are wealthy and in the 38% tax bracket that would give you 00/38% = 94 worth of health care free to everyone.
If you are middle class and in the 25% tax bracket that would give you 00/25% = ,000 worth of health care free to everyone.
See? Wealthy people would enjoy less tax exemptions. That’s progressive.

Now goes Mr. Obama actual proposal to put a cap on health care tax deductions. Needless to say that people who by health care insurance privately do not need to apply. This is how Obama encourages small businesses in their mission of jobs creation. But lets forget about such small irrelevant things.

There is now 100% tax detectability of health care group policy provided by employers. Obama wants to put 00 cap on this tax deductible benefits. Meaning that compared to McCain’s plan wealthy people whose tax deduction would be only 94 anyway under McCain will get no tax hit, but those in the middle class will be liable for the difference ,000 – ,000 = ,000 to lose its tax deductible and hence pay ,000 x 25% = ,000 extra tax.

So much for taxing the rich.
Ref:

http://taxvox.taxpolicycenter.org/blog/_archives/2009/2/26/4105759.html

There are more and I admit that some of my input data are not accurate, but its only because

a) The liberal media ignores the misdeeds of Barack Obama
b) The plans are still in the making – and this is the best point to stop them.
Ref:

http://taxvox.taxpolicycenter.org/blog/_archives/2009/2/26/4105759.html

There are more and I admit that some of my input data are not accurate, but its only because

a) The liberal media ignores the misdeeds of Barack Obama
b) The plans are still in the making – and this is the best point to stop them.