4- Your friend holds a time-payment purchase contract on a car. The contract cal

Question

4- Your friend holds a time-payment purchase contract on a car. The contract calls for $200/month for five years. She offers to sell the contract to you for $10,000 today. If you can get a monthly rate of 1% on your money, will you buy the contract?

5- A contractor borrows $1000 and agrees to repay it in 4 years at an interest rate of 12% per year. What is the value of the equal end-of-year payments?

6- If a student deposits, $500 at the end of each year in a savings account that pays 6% interest per year, how much will be in the account at the end of 5 years.

Explanation / Answer

4. time period = 12 x 5 = 60 months

PV of monthly payments = 200/(1 + 1%) + ..... + 200/(1 + 1%)60

PV of monthly payments = $8991.01

The contract would not be bought at $10000 as it is greater than its present worth of $8991.01

5.

PV = 1000 , time period = 4 years and end of year payment = y

y/1.12 + .... + y/1.124 = 1000

y = $329.23

6.

Amount deposited = $500

time period = 5 years, interest rate = 6%

FV = 500 x (1 + 6%)4 + 500 x (1 + 6%)3 + ... + 500

FV = $2818.55

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