Problem 3: Time Value of Money Calculations (20 points) (10 pts) Mrs. Vanderbilt

Question

Problem 3: Time Value of Money Calculations (20 points) (10 pts) Mrs. Vanderbilt presently owes a balance of $10,000 on a furniture loan that was originally negotiated at an interest rate of 8% per annum. A total of 20 equal annual payments remain to be made with the first due in one yea s time. If the loan can be refinanced at 6% per annum, how much can Mrs. (a) pa day for refinancing cha (b) (10 pts) Shady Brian's Used Cars advertises a low 6% per year financing deal over 24 months Accordingly, Shady Brian offers the following deal on a lemon-yellow convertible List price Less: Down Payment Balance to finance 5999.00 1500.00 4499.00 Add: Credit Investigation 6% of $4499 (269.94 per year) Total Monthly payment (total/24) 75.00 539.88 5113.88 213.08 Alternatively, Brian will sell you the car for $5250 now. Based on what you have learned from Dr. Leipzig you realize this means that Shady Brian's deal is asking you to finance $5250 minus your down payment. at actual effective annual interest rate is paid on Shady Briarn Brian financing deal For5 points extra credit calculate the apparent effective annual interest rate that Brian is trying to trick you into considering

Explanation / Answer

if she takes loan @8% then First EMI will be = Amount of Loan/PVAF(20 years, 8%)

= 10000/9.8181= 1018.53/-

if she move for 6% then EMI will be = 10000/PVAF(20 years, 6%)

=10000/11.47= 871.84/-

she can make expences in first year in refinancing= 1018.53- 871.84= 146.69$/-

b) As Per Seller quototion of finance is given as below

he has paid to seller 6 % fixed interest for 2years . hence interest rate by discounting method is given as below

EMI= Amount of Loan/ PVAF(24 Months, r%)

178.125= 3750/PVAF(24 months, r%)

PVAF(24 months, r%)= 21.05

r=1%p.m Apx i.e Apx 12% interest p.a

List Price 5250 Less " Downm Payment 1500 Balance to Refinance 3750 Add: Credit Investigation 75 Add: 6% interest (2years) 450 4275 Monthly Payment' 178.125

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