W17_TRI_ Loan Analysis using Present Value

1.      Problem recognition, definition and evaluation

I have been offered with personal loan from national reputable bank that has agreement with my company. The bank offered a maximum Rp 100 million loan for 5 years. That would be better to analyze and compare the value of some loan scenarios using present value (PV). In this analysis, the installment duration will be for 12 months or 24 months

2.      Development of the feasible alternative

Here are the parameters used in analyzing loan’s PV.

3.      Development of the outcome

Using data above, the Net Present Value (NPV) of two installment scenarios, i.e. 12 months and 24 months, are presented in Table 1 and Table 2.

Table 1. Installment Plan for 12 Months

Table 2. Installment Plan for 24 Months

4.      Selection of criteria

According to Table 1 and Table 2, installment 1 is better scenario since it produced fewer present value compared to installment 2.

5.      Analysis

What if the break mechanism is applied? If a debtor wants to pay all of remaining loan, he only has to pay remaining loan principle plus penalty fee. In other words, he can use the unpaid loan-interest as saving and get monthly saving interest (assumed 1.5% per annum).

6.      Selection of alternative

Using principle of time value of money, the analysis can be redone with loan-break scenario. The loan principle and penalty fee will be paid in month 13, while unpaid loan interest for saving interest calculation will be assumed as per progress of monthly loan interest.

The value year 2 is obtained from loan principle payment including penalty fee paid in month 13 less yearly loan interest saving and its saving interest. As result, NPV can be calculated as shown in Table 3.

Table 3. Installment Plan for 24 Months with Break Month 13

And if it won’t be considered saving from unpaid loan interest, the table will be as follows.

Table 4. Installment Plan for 24 Months with Break Month 13 No Saving

7.      Performance monitoring and post-evaluation of results

From analysis above, the summary of three scenarios are shown in Table 5. In early analysis, it indicated that scenario 1 is best installment plan. However, using the principle time value of money, scenario 3 has shown the most interesting one. Then, scenario 4 becomes more favorable even compared to scenario 1. To summarize, time value of money shall be adopted in analyzing loan and installment scenarios in order to get the most beneficial one for debtor side.

Table 5. Summary of Installment Scenarios

References:

·         Engineering Economics-Fifteen Edition, chapter 4, The Time Value Of Money

·         Inflation target. Retrieved from: www.bi.go.id

·         Understanding The Time Value Of Money. Retrieved from: www.investopedia.com