W7_FELIX_EVALUATING BANK LOAN USING CASH FLOW

1.    Problem Recognition, Definition and Evaluation

With new home already bought, know I need a good vehicle to replace my motorbike.  I plan to purchase a car so I can go to work more safety.  Since I don’t have enough cash at my pocket, than I plan to loan the money. The Price of the car that I want to buy is Rp. 150.000.000,-

The Problem is where I can have loan with low installment payment.

2.    Feasible alternatives

I have check several bank loan and found two creditor with attractive rate i.e :

a.      Leasing from Bank BNI

The bank interest rate is 10% per year for two years fix rate, administration and insurance cost must be paid 3% from total loan and payment must be monthly payment with guarantee loan one time installment and will be return when the total loan was paid.

b.      Borrow from Company insurance:

The company insurance rate take 12% per year, but must become a member and shall saving monthly Rp. 50.000,         

Both creditor give maximum loan for 5 years.

3.    The casflow for each feasible alternatives

a.      Leasing from Bank

Bank Interest rate = 10%/year or 0.88%/month for first two period

Administration cost = 3% from total loan = Rp. 6.000.000,-

Guarantee loan = 1x of monthly installment.

Using A (annuity value) we can find monthly installment :

            A=P(P/A,i%,n) = :

            With     P          = Rp. 200.000.000,-

                        I           =  0.88%

                        N         =  5x12 = 60 Month               

                       A          = Rp.200.000.000(P/A,0.88%,60) =  Rp. 4,249,408.94

The cash flow can be draw at below figure:

 

      b.   Borrow from Company Insurance

Company Insurance rate : 12%/year or 1%/month

Monthly saving    : Rp. 50.000,- with interest 5% per year.

Savings can be taken after total loan was paid.

Using A (annuity value) we can find monthly installment :

A=P(P/A,i%,n) = :

     Where P          = Rp. 200.000.000,-

                 i           =  1.00%

                 N         =  5x12 = 60 Month               

                 A          = Rp.200.000.000(P/A,1%,60) =  Rp. 4,448,889.-

Using FV for calculating total saving after 60 month.

F=A(F/A,i%,n) = F=

Where      A          = Rp.50.000

                 i           = 0.42%

                 N         = 60 month

                                    F          = Rp.50.000(F/A,0.42%,60) = Rp. 3,400,304.14

         The cash flow can be draw at below figure:

4.    Selection of the acceptable criteria.

Using cash flow diagram, we will analyze which one is more acceptable. 

5.    Analysis for the alternatives

Leasing from bank

If all 5 years interest rate is fix and continue 10%/year than total Payment will be Rp. 4,249,409.- x 60 + Rp. 6.000.000,- = Rp. 260,964,536.-

But based from economic changes the real rate will depend on the market value.

From Bank Negara Indonesia rate, average rate per year will be take 13%.

Assume after two years fix rate period, the third year, fourth year and five year will have interest rate 13% /year than the cash flow can be shown below.

Using A (annuity value) we can find monthly installment :

i = 13%/12 = 1.083%

            A= P(P/A,i%,n) = :

            With     P          = Rp. 200.000.000,-

                        i           =  1.083%

                        N         =  5x12 = 60 Month 

                        A         = Rp.200.000.000(P/A,1.04%,60) =   IRp. 4,550,614.-

The cash flow can be draw at below figure:

 

Total payment can be calculated : Rp. 4,249,409 x 24 + Rp. 6.000.000 + Rp  IDR 4,550,614.61x36 = Rp271,807,940.-

Borrow from Company Insurance

Since my company give fix rate for 5 years than total Payment will be Rp. 4,448,889.54.- x 60 + Rp.50.000 x 60 - Rp. 3.400.304,- = Rp.273,333,676..-

6.    Select the preferred alternative

From above analysis we can take conclusion that loan from Bank will take lower cash flow installment payment for 2 years period I.e. Rp. 4,249,409 for two years period  compare with borrow from insurance company i.e. Rp. 4,498,889. But after two years period the monthly installment from Bank is higher i.e Rp. 4,550,614 for the last three year average.

Total Payment if I loan from bank is cheaper compare if I loan from insurance company i.e. Rp. Rp271,807,940 vs Rp.273,333,676.

Based from that I will consider to loan from Bank.

7.    Performance Monitoring & Post Evaluation of Result

Performance and the quality of these calculation can be review yearly.

8.    Reference:

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

-     Understanding The Time Value Of Money, www.investopedia.com

-     Time value of money, http://en.wikipedia.org/wiki/Time_value_of_money

-     BNI KPR, http://www.ibank.bni.co.id