1. A client of your bank wants to save $50,000 as a down payment on a house in s

Question

1. A client of your bank wants to save $50,000 as a down payment on a house in six years. How much does she need to invest today in an account paying 7.25% annually?

2. You are offered an investment that will make three $6,000 payments at the end of each period. The first payment will occur four years from today. The second will occur in five years, and the third will take place in six years. If you can earn 12%, what is the most you are willing to pay for this investment today? What is the future value of the cash flows?

Explanation / Answer

Let the amount be A

So, 50,000 = A * (1.0725^6)

=> A = 50,000/1.521892

=> A = $32,853.84

(2) Most I am willing to pay = (6000/1.12^4) + (6000/1.12^5) + (6000/1.12^6) = $9,158.44

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