Your rich uncle has just given you $42,000. You have found a long-term investmen
ID: 2452402 • Letter: Y
Question
Your rich uncle has just given you $42,000. You have found a long-term investment that earns 5.75%, compounded annually. Assuming you put all of your uncle’s money into this investment, what will the total value of the investment be at the end of 25 years?
Total value after 25 years:___________________
2. Your best friend is anxious to purchase a home. He is expecting to borrow $210,000 at an annual rate of 4.2%, compounded monthly. The loan will be paid off monthly, over 30 years. What is the amount of the monthly payment? (hint: the total number of payments is 30 x 12 = 360, and you need to calculate a monthly interest rate)
Monthly payment:___________________
3. You are considering purchasing land for investment. The current landowner is willing sell you the land in exchange for a $70,000 note payable over 12 years. The landowner would require a payment of $9,049 at the end of each year for 12 years. Calculate the annual interest rate on this loan. (hint: this is an internal rate of return problem)
Interest rate:___________________
Explanation / Answer
1)Future value = Present value * (1 + R)^ n
= 42000 ( 1+ .0575 )^25
= 42000 * 4.04585
= $ 169,925.55
2)Monthly rate = 4.2 /12 = .35% , Number of months = 30 * 12 =$ 360
Monthly payment = Loan amount / PVAF@ .35% ,
= 210,000 / 204.49
= $ 1026.95
3)
At 8% ,present value = PVAF@8%, 12 * payment
= 7.53608*9049
= $ 68193.97
At 6% present value = 8.38384 * 9049
= $ 75865.40
using IRR formula = LDR + [(Present value at LDR -initial investment)(HDR -LDR) ]/[Present value at LDR -Present value at HDR]
= 6+ [(75865. 40 - 70000 )(8- 6) ]/[ 75865.4- 68193.97]
= 6 + [ 5865.4*2 / 7671.43]
= 6 + [11730.8/ 7671.43]
= 6 + 1.53
= 7 .53%
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