PROBLEMS – Show your work! For time value of money problems, show your inputs, a

Question

PROBLEMS – Show your work! For time value of money problems, show your inputs, and tell me what you use for the calculations! No work and its wrong = 0 points!

Compute the present value of a one-time payment of $1,000 paid in four years using the following discount rates: 2.0% in year 1, 2.25% in year 2, 4% in year 3, and 4.5% in year 4. Present Value: $

(5 points) TV’s R Yours is advertising a deal, in which you buy a flat screen TV for $1,192.25 (including tax) with one year before you need to pay (no interest is incurred if you pay by the end of the one year). How much would you need to deposit at the end of each month in a savings account earning 1.2% APR, compounded monthly, to be able to pay the $1,192.25 bill in one year? Monthly Deposit:

(8 points) You purchase a house for $300,000 by getting a mortgage for $240,000 and paying a $60,000 down payment (20%). You can get a 15-year mortgage with a 3.6% interest rate. A. What would be your monthly payment? B. What would be the loan balance be in 10 years?

Explanation / Answer

2.

Formula for future value of Annuity :

FV= A [ (1+k)n-1/k]

FV = Future annuity value=1192.25

A = periodical (monthly) investment =

K=interest rate=1.2% pa= 0.1% per month

N=periods=12 months

1192.25 =A[(1.001)12-1]/0.001

1.19225=A*0.0121

A=98.53

So monthly deposit required =$98.53

3.

So loan balance at the end of 10 years is $94,805

Year 0 Year 1 Year 2 Year 3 Year 4 Discount rate 2.00% 2.25% 4.00% 4.50% Discount factor 0.980392 0.977995 0.961538 0.956938 Cash Received value 882.24 899.8851 920.1325 956.9378 1000 So present value of the $1000 cash paid in 4 years is $882.24

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