A firm is considering 2 capital investment projects. Project A involves an initial cost of $125,000.
The discounted present value of all future cash flows is $145,000. Project B requires an initial
expenditure of $85,000. The discounted present value of all future cash flows is $102,000.
Calculate the net present value of each of the 2
projects. Which would be preferred according to the
net present value criterion?
Project A: NPV = 145000 – 125000 = $20,000.00
Project B: NPV = 102000 – 85000 = $17,000.00
Project A would be the preferred project as it offers the greatest return.
Calculate the profitability index of each of the 2
projects. Which would be preferred according to the
profitability index criterion?
Project A: PI = 145000/125000 = 1.16
Project B: PI = 102000/85000 = 1.2
Project B would be the preferred project as the return for each dollar invested is higher.
Do you think the interest on payday loans is too high or just right? Should Christians charge poor
people interest on loans?
According to Check into Cash’s (2016) website: “The APR for a $100 single-payment payday loan
may range from 260.71% to 782.14% on 14 day terms.” Breaking this down, the 260.71 percent
rate equates to a 10 percent loan over the 14 day period while 782.14 percent comes out to be
around 30 percent over the same period. The rates of 10 to 30 percent are the same rates as
credit cards charge on an annual basis. Since the cash advance is for a shorter period, the firm
must charge the higher rates to get a return on their investment and cover the risk associated with
these loans. People that borrow from these firms usually have bad or no credit. High risk is
rewarded with higher returns. I believe looking at it from the actual dollar amount
of the interest paid on the loan makes it seem fair. I do not believe anyone should borrow money
at 30 percent interest though.
Referring to the poor the Bible states: “but you shall open your hand to him and lend him
sufficient for his need, whatever it may be” (Deuteronomy 15:8, ESV) and “It is well with the
man who deals generously and lends; who conducts his affairs with justice” (Psalms 112:5,
ESV). Matthew 5:42 (ESV) tells us “Give to the one who begs from you, and do not refuse the
one who would borrow from you” and Luke 6:34 – 35 states:
And if you lend to those from
whom you expect to receive,
what credit is that to you?
Even sinners lend to sinners to
get back the same amount.
But love your enemies, and do
good, and lend, expecting
nothing in return, and your
reward will be great, and you
will be sons of the Most High,
for he is kind to the
ungrateful and the evil.
The common theme is to give to those in need and to lend without expecting a return. This type
of lending is charity not business. If you want to help a poor person who is trying to help
themselves, then you should be willing to lend them what they need, if you have it. If they
decide to repay you, then that is fine, but if not, you did the right thing.
Exploiting the poor for profit is not right. Micro loans were created to help people in
poor countries get out of poverty. According to MacGaraquhar (2010), these loans have turned
into big money makers for lenders, with loans averaging interest rates of 37 percent. Yee (2016)
finds even higher interest rates, stating that the average rate is between 75 and 100 percent in
some countries. The Small Business Administration (2016) says that interest rates in the United
States range between 8 and 13 percent. This is more than likely due to the competition in
America, while other countries do not have options to choose from. “Processing microfinance is
as expensive as big banking but profits are smaller. As a result, fees and interest are higher than
those of traditional loans” (Marotta & Russell, 2016). Covering the costs of administrating loans
is reasonable, but charging the excessive interest rates to make huge profits is not. These people
are poor in most countries and are just trying to feed their families. When lenders charge
excessive interest rates, they do not help the poor get out of poverty, instead they make sure they
stay in it. God blesses people so they can help others, not for self-indulgence. Lenders should
be honest and fair by charging reasonable rates.
References
Check into Cash. (2016). Check into cash locations/stores. Retrieved from
https://checkintocash.com/store-locator/?zip=32226
MacGarquhar, N. (2010). Banks making big profits from tiny loans. The New York Times.
Retrieved from http://www.nytimes.com/2010/04/14/world/14microfinance.html?
pagewanted=all&_r=0
Marotta, D. J. & Russell, M. (2016). Micro loans: Give a little, help a lot. USA Today. Retrieved
from: http://www.usatoday.com/story/money/personalfinance/2016/01/16/advice-iq-micro-
loans/78877246/
SBA, (2016). Loans & grants. U.S. Small Business Administration. Retrieved from
https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/microloan-program
Yee, A. (2015). Why microfinance loans have such high rates. The Wall Street Journal.
Retrieved from
http://financingthefuture.wsj.com/article/SB10171014995452453472504581163731575525412
