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1. An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is this investment’s present value? Its future value?  2. You want to buy a car, and a local bank will lend you $20,000. The loan would be fully amortized over 5 years (60 months), and the nominal interest rate would be 12% with interest paid monthly. What is the monthly loan payment? What is the loan’s EFF%?

Question

1. An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is this investment’s present value? Its future value? 

 

2. You want to buy a car, and a local bank will lend you $20,000. The loan would be fully amortized over 5 years (60 months), and the nominal interest rate would be 12% with interest paid monthly. What is the monthly loan payment? What is the loan’s EFF%?

check_circleAnswer
Step 1

1)

Calculate the present and future value of an investment:

 Excel workings:

A
B
1 Years
100
100
100
200
300
500
0.08
Values
2 1
3 2
4 3
5 4
6 5
7 6
8
r
|=NPV(B8,B2:B7).
10 PV
11
|=FV(B8,6,0,-B10)
12 FV
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Image Transcriptionclose

A B 1 Years 100 100 100 200 300 500 0.08 Values 2 1 3 2 4 3 5 4 6 5 7 6 8 r |=NPV(B8,B2:B7). 10 PV 11 |=FV(B8,6,0,-B10) 12 FV

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Step 2

Excel spreadsheet:

A
B
1 Years Values
1
$100
2
$100
2
3
$100
3
4
4
$200
5
5
$300
6
$500
6
7
8%
r
10 PV
$923.98
11
12 FV
Si,466.23
st
LC
help_outline

Image Transcriptionclose

A B 1 Years Values 1 $100 2 $100 2 3 $100 3 4 4 $200 5 5 $300 6 $500 6 7 8% r 10 PV $923.98 11 12 FV Si,466.23 st LC

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Step 3

2)

Calculate the monthly loan payment and loan’s EFF:

 Excel worki...

A
B
1 Particulars
2 Loan
Values
|20000
-5 *12
- 12 % / 12
=PMT(B4,B3,-B2,0)
3 N
4 f
5 PMT
help_outline

Image Transcriptionclose

A B 1 Particulars 2 Loan Values |20000 -5 *12 - 12 % / 12 =PMT(B4,B3,-B2,0) 3 N 4 f 5 PMT

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