1. You are looking at a one-year loan of $15,500. The interest rate on a one-yea
ID: 2651855 • Letter: 1
Question
1. You are looking at a one-year loan of $15,500. The interest rate on a one-year loan is quoted as 11.8 percent plus three points. What is the EAR? (Round your answer to 2 decimal places. (e.g., 32.16))
2.
You have 42 years left until retirement and want to retire with $4.8 million. Your salary is paid annually, and you will receive $76,000 at the end of the current year. Your salary will increase at 2.6 percent per year, and you can earn a 10.0 percent return on the money you invest. If you save a constant percentage of your salary, what percentage of your salary must you save each year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
3.
The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2.0 percent per period.
Effective annual rate %
Explanation / Answer
The answer is as follows:
1.
Loan repayment amount = $15,500(1.118) = 17,329.
Amount received = $15,500(1-0.03) = $15,035.
17,329 = $15,035(1+r)
1+r = $17,329/$15,035
1+r = 1.15268
r = 1.15268-1 =0.15268 or 15.268%.
The effective rate is not effected by the loan amount, since it drops out when solving for r.
2.
Compute the salalry percentage saving that should be made each year.
let the percentage be x
76000 * x / 100 is the first payment = 760x
760x * ( 1.1 )^41 + ... + 760x * 1.026^41 = 4800000
=> 532254.39x = 4800000
x = 9.018%
9.02%
3.
Compute the break-even quantity for the new creit policy.
Fixed costs = Sales - Variable Costs = 2,900 * (68 - 36) = $92,800.
lex x be the break even quantity
Present value of sales = 70 x / (1+2%) = 68.6275 x
x = $92,800 / (68.6275 - 36)
x = 2,844.226
Therefore, the breakeven quantity is $2,844.26 units.
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