You are on the leadership team for a small business, XYZ Incorporated. After years of growth, sales have begun to stagnate over the last two years. Sales for XYZ have been constant at $900,000. Net Income was $50,000 last year and is expected to be $30,000 this current year if a change isn't made. XYZ has $85,000 in reserves to cover any shortfall. A change is needed to hopefully revitalize XYZ into a new period of growth. The leadership of XYZ is willing to take out a loan in order to finance this change. The maximum amount of the loan would be $250,000 at 5% interest with payments amortized over 20 years and a balloon payment at the end of 5 years. In working with a consultant, the leadership team has settled on two options that are good candidates for change. Option A will cost the full $250,000. The leadership team has settled on the following probability scenarios. The Total Return at End of 5th Year is based on the $50,000 net income from last year (e.g., 100% return would mean that XYZ would have $100,000 return from the investment available to pay off the mortgage. This is 100% x $50,000 + $50,000): Scenario Probability Total Return at End of 5th Year Best Case .10 750% Good Case .25 600% Most Likely .35 400% Poor Case .20 200% Worst Case .10 -50% Option B will cost the $100,000. The leadership team has settled on the following probability scenarios: Scenario Probability Total Return at End of 5th Year Best Case .05 400% Good Case .30 300% Most Likely .45 200% Poor Case .15 100% Worst Case .05 50% Given the above information, answer the following questions. What would be the balloon payments required under Options A and B?
You are on the leadership team for a small business, XYZ Incorporated. After years of growth, sales have begun to stagnate over the last two years. Sales for XYZ have been constant at $900,000. Net Income was $50,000 last year and is expected to be $30,000 this current year if a change isn't made. XYZ has $85,000 in reserves to cover any shortfall. A change is needed to hopefully revitalize XYZ into a new period of growth. The leadership of XYZ is willing to take out a loan in order to finance this change. The maximum amount of the loan would be $250,000 at 5% interest with payments amortized over 20 years and a balloon payment at the end of 5 years. In working with a consultant, the leadership team has settled on two options that are good candidates for change. Option A will cost the full $250,000. The leadership team has settled on the following probability scenarios. The Total Return at End of 5th Year is based on the $50,000 net income from last year (e.g., 100% return would mean that XYZ would have $100,000
- What would be the balloon payments required under Options A and B?
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