a) If I were to invest in a firm that produced cash inflows of $4000 at the end
ID: 2739630 • Letter: A
Question
a) If I were to invest in a firm that produced cash inflows of $4000 at the end of each of the next 4 years, what would that investment be worth today, if my required rate of return was 16%?
b)If I buy a car today using a $23,000 loan payable in 72 monthly installments with a 6.25% annual interest rate and interest calculated monthly, how much is my monthly payment?
c) I want to have $27,000 in an investment account 5 years from now. The account will pay 0.2 percent interest per month. If I save money every month, starting at the end of this month, how much will I have to save each month to reach my goal?
d) James spent $74,000 to refurbish its current facility. The firm borrowed 90 percent of the refurbishment cost at 7.2 percent interest for 5 years. What is the amount of each monthly payment assuming interest is calculated monthly?
e)I'm going to start saving $2000 per month at the end of this month. I am going to earn an annual rate of 6% on this money in an account that compounds monthly. Once the account hits $1,000,000, I'm retiring. If I'm 33 now, how old will I be when I retire?
f)My store is planning a major expansion for 4 years from today. In preparation for this, the company is setting aside $35,000 each quarter, starting *today*, for the next 4 years. How much money will the firm have when it is ready to expand if it can earn an average of 6.25 percent on its savings compounded annually?
Explanation / Answer
a) If I were to invest in a firm that produced cash inflows of $4000 at the end of each of the next 4 years, what would that investment be worth today, if my required rate of return was 16%?
ANSWER=
Present value of investment = annual cash inflow * Present value factor (4years, 16%)
= $4000 * 2.798
= $11192
b)If I buy a car today using a $23,000 loan payable in 72 monthly installments with a 6.25% annual interest rate and interest calculated monthly, how much is my monthly payment?
ANSWER =
P = r(PV) / 1- (1+r)-n
= $23000 * .00520 / 1- (1+0.00520]-72
= $383.79
c) I want to have $27,000 in an investment account 5 years from now. The account will pay 0.2 percent interest per month. If I save money every month, starting at the end of this month, how much will I have to save each month to reach my goal?
Let savings every month = X
Investment in 5 years = savings each month for 5 years * ( 1+ 0.2)60
$27000 / 12.53 = each month savings for 5 years
=$1995.81
d) James spent $74,000 to refurbish its current facility. The firm borrowed 90 percent of the refurbishment cost at 7.2 percent interest for 5 years. What is the amount of each monthly payment assuming interest is calculated monthly?
Borrowed amount = $74000 * .9 = $66600
Interest rate = 7.2%
N = 5 years
P = r(PV) / 1- (1+r)-n
= $66600 * .06 / 1- (1+0.06]-72
= $1325.05
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