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Fin 6301 Prof. Yexiao Xu Section 001 Fall 2015 Problem Set #2 Due in class by 1:00 PM Wednesday, September 16, 2015 Show your work! 1. Mary is interested in driving a new 2015 Ford Taurus for three years. The Ford dealer quoted Mary two options— financing or leasing. The leasing deal requires a down payment of $1,999 and a monthly payment of $239 for 36 months. Alternative she can purchase Taurus at $21,999 using dealer’s promotional financing deal at 2.99% interest rate (APR on a monthly base) for 36 months. At the end of the 36 month, the car is worth 65% of the purchase price. (that is, if she leases the car, she can buy the car from the dealer at that price; if she purchases the car, she can sell the car at that…show more content…
(c) Instead of buying a nice car, he brought a used car for $10,000, and saved the rest of signing bonus in a separate investment account for retirement that pays 9.6% annual interest (APR on a monthly base). If John wants to have $2 million when he retires in 35 years, what percentage of salary should John invest in his 401K account? 3. In the setting of problem 2(a), John will transfer her money at the age of 65 (his retirement) from his 401K account (valued at $2 million) into a safe account which will earn an annual interest of 3.6% (APR on a monthly base). (a) If he wants to use up all his money at the age of 90, how much can he spend each month after retirement? (b) With the increase in life expectancy, John does not know how long he will live. So he buys a whole life annuity using all of his money at retirement. Assuming the same 3.6% return, how much can he consume each month? (hint: the whole life annuity is just like a perpetuity) (c) Continue from (b). If John actually dies at the age of 90, how much he could pass to his children if he does not buy the whole life annuity but consumes at the level computed in (b)? 4. Martin Midstream Partners, an oil and gas service company headquartered in Texas is considering expanding its business through a series investment projects. All projects will last for 5 years. Project A requires an investment of $5 million, but will generate $2 million in year 1, and this cash
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