BusM 401
Problem Set #1
Review of Financial Functions
Solutions
1.
You are buying a new minivan for $22,000.
You will finance the purchase over 4
years making monthly payments, and you won’t pay off the loan early.
You are putting
$0 down.
The dealer offers you two deals.
The first deal is a $2,000 up-front rebate and
6.9% financing.
The second deal is no rebate and special 1.9% financing.
Which deal do
you take?
Deal 1:
N=48, I/YR=6.9, PV=20,000, FV=0; solve for PMT = $478.00
Deal 2:
N=48, I/YR=1.9, PV=22,000, FV=0; solve for PMT = $476.33
2.
You borrowed $100,000 and you wish to repay the loan by paying $10,000 a year.
How many years will it take you to repay the loan if the annual interest rate is 8%?
How
does your answer change if the annual interest rate is 10%?
I/YR=8, PV=100,000, PMT=-10,000, FV=0, (end mode, 1 P/YR), solve for N=20.9
At 10%, you will never repay the loan, as you are only keeping up with interest.
3.