Ann got a 30 year frm with annual payments equal to $12,000 per year. after 2 years of payments ann will refinance the balance into a 28 year frm with annual payments equal to $10,000 per year. refinancing will cost ann $2,500. ann will prepay the new loan 3 years after refinancing. she will save $4,000 on her loan balance when she prepays. what is ann s annualized irr from refinancing?

Ann s annualized IRR from refinancing is -0.0960

Explanation:

A / 1B                                               C          DEFGH

2Ann        

3FRM duration in years                 30      

4Annual payment$                    12,000      

5Total Payments for 30 years        $360,000    

6Payments made for                 2             years    

7Payment amount for 2 year         $24,000      

8     after two years FRM outstanding  $336,000    

9        

10Refinancing is done for                  28               years    

11Annual payment                          $10,000      

12Total Payments for 28 years$       280,000    

13Refinancing Cost                           $2,500      

14Total amount of cost                   $282,500    

15 Balance outstanding before refinancing   336,000    

16Amount saved at the end of 2nd year   $53,500    period cashflow cash payment  cost of refinance prepayment NetFlow

0     360,000                                                    360,000

1                  (12,000.0)                                   (12,000)

2                              (12,000.0)       (2,500)                   (14,500)

3    280,000.0  (10,000)                                (336,000)(66,000)

4                   (10,000)                                                   (10,000)

5                              (10,000)                              (246,000) (256,000)

    640,000(54,000)                (2,500)     (582,000)        1,500

IRR = -0.0960%

Therefore, Ann s annualized IRR from refinancing is -0.0960

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