Loan Comparison Details
In order to compare the costs of different alternatives,
the input cash flow for the alternatives must be represented
in equivalent values. The equivalent value of a cash flow accounts
for the time-value of money. That is, it is preferable to pay the same amount of
money later than to pay it now, since the money can earn interest
while you keep it.
The MARR (Minimum Attractive Rate of Return)
reflects the cost of capital or the opportunity cost of money,
that is, the interest that would have been earned on the savings
that is foregone by making the investment. The MARR is used to discount
the cash flow of alternatives into equivalent values at a fixed point in time.
The MARR can vary for each investor and for each investment.
Therefore, the MARR= option must be specified in the COMPARE statement
if present worth of cost (PWOFCOST option) comparison is specified.
Present worth of cost reflects the equivalent amount at loan initialization
of the loan cash flow discounted at MARR, not
accounting for inflation. Present worth of cost accounts for the
down payment, initialization costs, discount points, periodic payments,
and the principal balance at the end of the report period. Therefore,
it reflects the present worth of cost of the asset, not the loan. It is
only meaningful to use minimization of present worth of cost as a
selection criterion if the assets (down payment plus loan amount) are of
the same value.
Another economic selection criterion is the rate of return (internal
rate of return) of the alternatives. If interest is being earned by
an alternative, the objective would be to maximize the rate of return.
If interest is being paid, as in loan alternatives, the best
alternative is the one that minimizes the rate of return. The
true interest rate reflects the effective annual rate charged on the
loan based on the cash flow, including the initialization cost and
the discount points.
The effects of taxes on different alternatives must be accounted for
when these vary among different alternatives. Since interest costs
on certain loans are tax-deductible, the comparisons for those loans are
made based on the after-tax cash flows. The cost of the loan is reduced by
the tax benefits it offers through the loan life if the TAXRATE= option is
The present worth of cost and true interest rate are calculated based on the
after-tax cash flow of the loan.
The down payment on the loan and initialization costs are assumed to
be not tax-deductible in after-tax
analysis. Discount points and the interest paid in each periodic payment
are assumed to be tax-deductible if the TAXRATE= option is specified.
If the TAXRATE= option is not specified, the present worth of cost and the
true interest rate are based on before-tax cash flow, assuming that
the interest paid on the specified loan does not qualify for tax
The other two selection criteria are breakeven
analysis of periodic payment and interest paid. If the objective
is to minimize the periodic payment, the best alternative would be
the one with the minimum periodic payment. If the objective is to
minimize the interest paid on the principal, then the best alternative
is the one with the least interest paid.
Another criterion might be the minimization of the outstanding balance
of the loan at a particular point in time. For example, if you plan
to sell a house before the end of the loan life (which
is often the case), you might want to select the loan with
the minimum principal balance at the time of the sale, since this
balance must be paid at that time. The outstanding
balance of the alternative loans is calculated for each loan
comparison period by default.
If you specified the START= option in the PROC LOAN statement,
the present worth
of cost reflects the equivalent amount for each loan at that point
in time. Any loan that has a START= specification different from the one
in the PROC LOAN statement is not processed in the loan comparison.
The loan comparison report for each comparison period contains
for each loan the loan label, outstanding balance,
and any of the following measures if requested in the COMPARE
statement: periodic payment (BREAKPAY option), total interest paid
to date (BREAKINTEREST option), present worth of cost (PWOFCOST option),
and true interest rate (TRUEINTEREST option). The best loan is selected
on the basis of present worth of cost or true interest rate. If both
PWOFCOST and TRUEINTEREST options are specified, present worth of
cost is the basis for the selection of the best loan.
You can use the OUTCOMP= option in the COMPARE statement to write the
loan comparison report to a data set. The NOCOMPRINT option
suppresses the printing of a loan comparison report.
Copyright © 1999 by SAS Institute Inc., Cary, NC, USA. All rights reserved.