Question

1. Jody is planning to buy a car for $15,000, putting 20% down in cash. The bank tells her that the interest rate on the loan will be 8% per year, compounded monthly, for a three-year loan. What is Jody’s monthly payment going to be?
2. Insurance policy promises to pay you and your heirs $1,000 per year forever, should you become ill. How much would you pay for this policy today if the opportunity cost of capital is 4.5%?
3. Mary estimated that she would have $222,870 in her account when she retires. However, suppose that Mary has now estimated that she would need $30,000 per year to live comfortably during her retirement. How long can Mary expect to make withdrawals during retirement before she will have depleted her account if she is earning 6% annually?
4. You decide to start investing in a savings account that earns 5% per year. One year from now, you plan on depositing $1,000 into the account, with the expectation that these deposits will grow by 2% each year for five years after the initial deposit (in other words, for a total stream of cash flows over six years). What is the present value of this stream of cash flows? How much will you have at the end of the deposit time period?

Answer 1

Q
1	Monthly payment	$376.04
2	Amount of policy	22222.22
3	Number of years	10.13
4	Present value	$5,321.34		Total FV	$7,131.11

WORKINGS

Year	Cash flow	Future value
1	1000	$1,276.28
2	1020	$1,239.82
3	1040.4	$1,204.39
4	1061.208	$1,169.98
5	1082.432	$1,136.55
6	1104.081	$1,104.08