Expert Answer:Valuation and Discounted Cash Flows: Mortgage prob

  

Solved by verified expert:Solve the problem using formulas or excel ( steps must be shown) Mr. and Mrs. Spirit purchased a $35,000 house 20 years ago. They took a 30-year
mortgage for $30,000 at a 3% annual interest rate. Their bank, the First Amityville
National Bank, has recently offered the Spirits two alternatives by which they
could prepay their mortgage. The Spirits have just made their 20th annual
payment.[A] Under the first alternative, the Spirits could prepay their mortgage at a 30% discount
from the current principal outstanding. If current 10-year mortgage rates are 12%, should the Spirits
accept the offer? Ignore taxes and assume payments are made at the end of each year (instead of
monthly).
[B] The second alternative would replace their existing mortgage with a five-year zero-interest
loan, in the amount of their current mortgage’s principal outstanding. This new loan was to be repaid
in 5 equal annual payments. The banker pointed out that this option would “save them well over
$2,000 in interest.”
Which alternative, if either, should the Spirits pursue?

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