Question

1)Mary Jo wants to buy a boat that is available at two dealerships. The price of the boat is the same at both dealerships. Middlefield Motors would let her make quarterly payments of 2,324.41 dollars for 7 years at a quarterly interest rate of 2.17 percent. Her first payment to Middlefield Motors would be due immediately. If Fairfax Boats would let her make equal monthly payments of 1,493.46 for 3 years and if her first payment to Fairfax Boats would be in 1 month, then what is the monthly interest rate that Mary Jo would be charged by Fairfax Boats? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

2)What is the value of a building that is expected to generate fixed annual cash flows of 101,300 dollars every year for a certain amount of time if the first annual cash flow is expected in 4 years, the last annual cash flow is expected in 11 years, and the appropriate discount rate is 13.98 percent?

Answer 1

Part 1

Step 1: Calculating the PV (price) of the boat
Step 2: Calculating the rate using the PV calculated in step 1

Step 1: Price of the boat is $48,394.05

Step 2: The monthly rate is 0.0058

Part 2 - The value of the building is $317,560.57

Discounting factor = (required rate ^ year)

Therefore, the discounting factor for year 4 = (1.1398^4)
the discounting factor for year 5 = (1.1398^5), and the same way for all the remaining years.