# Quiz 1 - Assignment Print View 1 of 10 1...

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1. award: 5 points 2. award: 5 points Assume the total cost of a college education will be \$390,000 when your child enters college in 18 years. You presently have \$64,000 to invest. Required: What annual rate of interest must you earn on your investment to cover the cost of your child’s college education? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Annual rate 10.56 ± 1% % Explanation: To answer this question, we can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r ) t Solving for r , we get: r = (FV / PV) 1 / t – 1 r = (\$390,000 / \$64,000) 1/18 – 1 r = 0.1056 or 10.56% Calculator Solution: Enter 18 ±\$64,000 \$390,000 N I/Y PV PMT FV Solve for 10.56% You are scheduled to receive annual payments of \$9,400 for each of the next 25 years. Your discount rate is 7.5 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year? \$7,859 \$8,289 \$10,105 \$9,044 \$9,400 APV = \$9,400 × {1 - [1 / (1 + 0.075) 25 ]} / 0.075 = \$104,781.29 A DUE PV = \$104,781.29 × (1 + 0.075) = \$112,639.89 Assignment Print View http://ezto.mhhm.mcgraw-hill.com/hm_finance.tpx 1 of 10 7/18/2011 3:48 PM

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3. award: 5 points Difference = \$112,639.89 - \$104,781.29 = \$7,858.60 = \$7,859 (rounded) You want to buy a new sports coupe for \$74,700, and the finance office at the dealership has quoted you a 7.1 percent APR loan for 72 months to buy the car. Requirement 1: What will your monthly payments be? (Do not include the dollar sign (\$). Round your answer to 2 decimal places (e.g., 32.16).) Monthly payment \$ 1,277.15 ± 1% Requirement 2: What is the effective annual rate on this loan? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Effective annual rate 7.34 ± 1% % Explanation: 1: We first need to find the annuity payment. We have the PVA, the length of the annuity, and the interest rate. Using the PVA equation: PVA = C ({1 – [1/(1 + r ) t ]} / r ) \$74,700 = C [1 – {1 / [1 + (0.071/12)] 72 } / (0.071/12)] Solving for the payment, we get: C = \$74,700 / 58.48957 C = \$1,277.15 2: To find the EAR, we use the EAR equation: EAR = [1 + (APR / m )] m – 1 EAR = [1 + (0.071 / 12)] 12 – 1 EAR = 0.0734 or 7.34% Calculator Solution: Enter 72 7.1% / 12 ±\$74,700 N I/Y PV PMT FV Solve for \$1,277.15 Enter 7.10% 12 NOM EFF C/Y Solve for 7.34% Assignment Print View http://ezto.mhhm.mcgraw-hill.com/hm_finance.tpx 2 of 10 7/18/2011 3:48 PM
4. award: 5 points 5. award: 5 points 6. award: 5 points 7. award: 5 points Your car dealer is willing to lease you a new car for \$309 a month for 72 months. The first monthly payment is made the day you sign the lease contract. If your cost of money is 2.9 percent, what is the current value of the lease? None of these answers is correct.

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## This note was uploaded on 08/02/2011 for the course FIN 320f taught by Professor Toprac during the Summer '08 term at University of Texas.

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Quiz 1 - Assignment Print View 1 of 10 1...

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