3. Solve below: a. Identify its type. John bought a new house. He made a $4,000

Question

3. Solve below:

a.

Identify its type.

John bought a new house. He made a $4,000 down payment and financed the rest, $280,000, through his credit union. The credit union charged him 9% per year compounded monthly for 24 years. How much were his monthly payments?

a) Present Value

b) Amortization

c) Future Value with compound interest

d) Sinking Fund

e) Present Value of an Annuity

f) None of the above.

b.

The manager of a manufacturing company knows that they will need a new machine in one of their factories. The new machine will cost them $13,700. The manager has determined that they can afford to pay 15% of the cost of the machine in cash. They can then finance the rest through a credit union. The credit union will charge 2% per year compounded monthly. How much are their monthly payments for 4 years?

a) $274.39

b) $381.28

c) $252.64

d) $233.23

e) $297.22

f) None of the above.

Explanation / Answer

Question - 3 (a) ................Select option - (e) PRESENT VALUE OF ANNUITY

Question - 3 (b) .................Select - Option - C

Here ............ r = 0.02 / 12 and for a period of 4 years we take n = 4 * 12 months = 48 periods

PVA = [ 1 - (1+r)-n ] / r = [ 1 - ( 1.001666666667)-48 ] / 0.001666666667 = 46.093307

Now for monthly installments ....... just take the loan amount and divide it with PVA

Monthly installment = [13700 * 85%] / 46.093307 = 252.64 .......................final answer

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