Evaluating Financial Options If Interest Rate Changes

Question: Discuss about the Evaluating Financial Options If Interest Rate Changes. Answer: Introduction: In this scenario at different interest rates we would consider whether decision changes by looking at results of both valuation methods. Most Viable Option If Interest Rate Changes: If we look at IRR method decision stands as still Interest only option was most viable option since at all different rates IRR was less than interest rates of this option as compared to other options where IRR is equal to or greater than there interest rates. If we look at Net Present Value decision changes and Interest Only Option seems more viable. At 7% and 5% option no 3 was viable but at 3% option no 2 was again feasible i.e. flexible rate option. It can be seen that total outflows at 7% amounting $ 396,673 and at 5% total outflows were $475,000 for option no 3 where as at 4% total outflows were $515,882 for option no 2.At 4% total outflows of option no 3 were $525,657 and as the interest rate increases to 7% it goes down to 396,673 difference of $128,984. Also the difference between outflows of options no 3 at 7% and outflows of option no 2 at 4% were $119,209. Conclusion As per IRR methods decision stands i.e. Interest only option is the best option and as per NPV it can be seen that as Interest rate increases Interest only mortgage option becomes feasible. Since we are saving $ 128,984 if we choose interest only option at 7% and $40,881 if we choose interest only option at 5% instead of flexible rate option at 4%. So the decision changes with change of interest rate. The most viable option is Interest only option