Question

In: Finance

Answer the following in Excel. A. Your friend is planning to buy a car and has...

Answer the following in Excel.

A. Your friend is planning to buy a car and has decided to contribute $300 to an investment account at the beginning of each month for the next 5 years. What will the value of this investment account be at the end of the 5years if your friend can earn a compound return of 8% per year compounded monthly?

B. At the end of year 5, your friend will purchase a car with a price of $40,000 using the final balance on the savings account and a car loan for the balance of the car's price. The loan will have monthly payments for 6 years due at the end of the month. The interest rate on the loan will be 4% compounded monthly. What would the monthly payments your friend will need to make on the loan?

Expert Solution

Sol:

A.

Monthly payment (PMT) = $300

Period (NPER) = 5 years, Monthly = 5 * 12 = 60

Interest rate = 8%, Compounded monthly = 8 / 12 = 0.6667%

To determine future value of this investment we have to use FV function in excel:

PMT	-300
NPER	60
Rate	0.6667%
Future value	$22,190.01

Therefore future value of the investment will be $22,190.01

B.

Loan present value (PV) = 40,000 - 22,190.01 = $17,809.99

Period (NPER) = 6 years, Monthly = 6 * 12 = 72

Interest rate = 4%, Compounded monthly = 4 / 12 = 0.3333%

To determine monthly payments on loan we have to use PMT function in excel:

Loan PV	$17,809.99
NPER	72
Rate	0.3333%
Monthly payment	$278.64

Therefore monthly payments on loan will be $278.64

Working

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