solution_FM_Questions

# solution_FM_Questions - Solution to 1(a IN order to solve...

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Solution to 1 (a) IN order to solve the first part, we need to follow the following formula – M = P [ i (1 + i ) n ] / [ (1 + i ) n - 1] Where M is the monthly payment. i = r /12. The same formula can be expressed much different way, but this one avoids using negative exponentials which confuse some calculators. Plan A Plan B loan 225,000 225,000 interest 7.80% 6% monthly interest (i) 0.0065 0.005 no. of years 25 15 no. of months (n) 300 180 Now in the above table, the monthly interest rate is 0.0065 and 0.005 respectively. We have converted the yearly rate in to the monthly rate because we need to calculate the monthly payments required under the two arrangements. This has been indicated as (i) in the formula. This has been calculated by simply dividing the interest rate by 12. These have been explained as follows: 7.8%/12 = 0.0065 and 6%/12 = 0.005 Now the number of years in this case is 25 years and 15 years and the periods according to the formula has also been converted to the number of months. This has been done by multiplying the no. of respective years with 12. These numbers are explained as follows: 25 x 12 = 300 months and 15 x 12 = 180 months. Now we can put all the values in the above mentioned formula as: Plan A: M = 225000x[0.0065x(1+0.0065)^300] / [(1+0.0065)^300 – 1] Now, the most typical part of this equation is (1.0065)^300 which can be solved by any scientific or financial calculator. The other options are using the logarithmic functions. I HAVE STILL NOT USED THE MS-EXCEL AS YOU HAVE DICTATED BUT I HOPE THAT I HAVE THE LIBERTY TO USE THE CALCULATORS. Using the calculator, the value of 1.0065^300 is 6.984475003. solving the same, we get the value of M = \$1706.88 Plan B: M = 225000x[0.005x(1+0.005)^180] / [(1+0.005)^180 – 1] Now, the most typical part of this equation is (1.005)^180 which can be solved by any scientific or financial calculator. The other options are using the logarithmic functions. I HAVE STILL NOT USED THE MS-EXCEL AS YOU HAVE DICTATED BUT I HOPE THAT I HAVE THE LIBERTY TO USE THE CALCULATORS. Using the calculator, the value of 1.005^180 is 2.454093562. solving the same, we get the value of M = \$1898.68

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Solution to 1 (b) In order to get the status of the loan outstanding after 5 years, we will have to prepare the amortization schedule. Plan A: Month Beginning Bal. Instalment Interest Principal Ending Balance 1 225,000.00 1,706.88 1,462.50 244.38 224,755.62 2 224,755.62 1,706.88 1,460.91 245.97 224,509.65 3 224,509.65 1,706.88 1,459.31 247.57 224,262.08 4 224,262.08 1,706.88 1,457.70 249.18 224,012.90 5 224,012.90 1,706.88 1,456.08 250.80 223,762.10 6 223,762.10 1,706.88 1,454.45 252.43 223,509.67 7 223,509.67 1,706.88 1,452.81 254.07 223,255.60 8 223,255.60 1,706.88 1,451.16 255.72 222,999.88 9 222,999.88 1,706.88 1,449.50 257.38 222,742.50 10 222,742.50 1,706.88 1,447.83 259.06 222,483.44 11 222,483.44 1,706.88 1,446.14 260.74 222,222.70 12 222,222.70 1,706.88 1,444.45 262.43 221,960.27 13 221,960.27 1,706.88
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## This note was uploaded on 05/13/2010 for the course MECH 17657 taught by Professor Ravikant during the Spring '10 term at Indian Institute of Technology, Delhi.

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solution_FM_Questions - Solution to 1(a IN order to solve...

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