Consider a construction loan made to ABC Inc. The loan amount is $6 million, which is drawn evenly (i. e., a $1,000,000 monthly draw) for the next six months. Assume that each disbursement occurs at the end of the month. The annual interest rate is 8% for the construction loan. What is roughly the total loan amount (including interest) required to finance this project?

A. $6,302,560

B. $6,100,893

C. $6,032,250

D. $6,345,810

B. $6,100,893

Explanation:

To calculate the total loan amount (including interest) required to finance this project, we calculate the future value of every month disbursement and its interest occurred.

We can manually calculate FV of every disbursement then sum up 6 disbursement

FV1 = 1,000,000 * (1+8%/12) ^5 = 1,033,781

FV2 = 1,000,000 * (1+8%/12) ^4 = 1,026,934

FV3 = 1,000,000 * (1+8%/12) ^3 = 1,020,133

FV4 = 1,000,000 * (1+8%/12) ^2 = 1,013,378

FV5=1,000,000 * (1+8%/12) ^1 = 1,006,667

FV6 = 1,000,000

Total = $6,100,893

In excel, the formula is FV (rate per month, number of disbursement, amount of each disbursement)

=FV (8%/12,6,1000000) = $6,100,893