Hey,
I have a theoretical investing scenario that I have been trying to figure out if a mathematical calculation exists. Hopefully Reddit's hivemind can help answer this question.
Here is the theoretical scenario:
I have $200,000 that I am looking to pay down 1 of 2 loans that I have.
Loan 1 balance: $2,000,000
Loan 2 balance: $200,000
Assume the terms for both loans are the same: term 25 years, interest rate 10%.
If I pay down either loan, I will be getting a 10% ROI as that is the interest rate.
If I pay off loan 1, nothing changes in terms of monthly payment the following month.
If I pay off loan 2, I will cash flow more the following month as that loan will no longer exist.
My question: besides the 10% ROI, is there an additional value for paying off loan 2 because I will be cash flow positive moving forward? AND IS IT CALCULABLE?
My theory: the total ROI of paying off loan 2 should be higher than the total ROI of simply paying down loan 1 because I would be cash flow positive (vs cash flow neutral); and, there is calculable value in having money now, rather than in the future (time value of money). So the total ROI must be greater than 10%. If my theory is true, can we actually calculate that difference in ROI?
What are your thoughts?