Use the table below to answer the following question: Assumption: Required effec

Question

Use the table below to answer the following question: Assumption: Required effective annual rate of return is 8.0%. What would the present value be if the investment pays you $10.000 at the end of each year for 3 years? Select one $25.719 $23.814 $27.833 $25.771 Use the table below to answer the question: Alicia gets a yearly alimony payment from her ex-husband and wants to saves enough to put a 30% down payment on a home in 5 years. Median homes go for $800,000. How much should Alicia put away into an investment each year if she can get a 6% return a year? Select one $21.054 $42.731 $15.733 $31.931

Explanation / Answer

Solution for Question 1

Equal annual payment = $10,000

Annual interest rate = 8%

Tenure = 3 year.

Present value of annuity for 3 year at interest rate of 8% is given in table which is 2.5771.

So present value of annuity payment = $10,000 × 2.5771

                                                            = $25,771

Present value of investment is $25,771.

Hence, Option D is correct answer.

Answer for question 2

Value of home = $600,000

Down payment = 30%

Down payment in dollar term = $600,000 × 30%

                                                 = $180,000

She has to save $180,000 in five year.

Annual interest rate = 6%

Tenure = 5 year

Future value of annuity for $1 is given in second table for 6% interest rate and for year which is 5.6371.

So annual saving = $180,000 / 5.6371

                            = $31,931

She has to save $31,931 per year for down payment

Hence, option (D) is correct answer.

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