Billy Dan and Betty Lou were recently married and want to start saving for their
ID: 2589217 • Letter: B
Question
Billy Dan and Betty Lou were recently married and want to start saving for their dream home. They expect the house they want will cost approximately $237,000. They hope to be able to purchase the house for cash in 8 years. To determine the appropriate discount factor(s) using tables, click here to view Tables I, II, III, or IV in the appendix. Alternatively, if you calculate the discount factor(s) using a formula, round to six (6) decimal places before using the factor in the problem. Required
a. How much will Billy Dan and Betty Lou have to invest each year to purchase their dream home at the end of 8 years? Assume an interest rate of 8 percent. (Round your answer to the nearest dollar amount.)
b. Billy Dan’s parents want to give the couple a substantial wedding gift for the purchase of their future home. How much must Billy Dan’s parents give them now if they are to reach the desired amount of $237,000 in 10 years? Assume an interest rate of 8 percent. (Round your answer to the nearest dollar amount.)
Explanation / Answer
a. Couples want to earn $237000 at the end of 8 years. Present value of periodic payments=$237000 Present value of periodic payments=periodic payment*cumulative present value factor @ 8% for 8 years. periodic payment=Present value of periodic payments/cumulative present value factor @ 8% for 8 years. periodic payment=237000/5.746639=$ 41241.5 Couples have to invest $41241.50 each year b. Present value of wedding at the end of 8 year=$237000 Wedding gift*Present value at 8% for 8th year=237000 Wedding gift*=237000/Present value at 8% for 8th year=237000/0.540269=$438670.5 Parents should give $438670.50 as wedding gift.
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