QUESTION 1 Pearl Monroe wants to create a fund today that wi

QUESTION 1

Pearl Monroe wants to create a fund today that will enable her to withdraw $26,800 per year for 6 years, with the first withdrawal to take place 4 years from today.

If the fund earns 11% interest, how much must Pearl invest today? (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.)

Investment amount $

QUESTION 2

Chris Taylor is settling a $20,780 loan due today by making 6 equal annual payments of $5,054.23.

Determine the interest rate on this loan, if the payments begin one year after the loan is signed. (Round answer to 0 decimal places, e.g. 8%.)

%

Solution

(1)

Invest in Fund today = Present Value of withdrawl

Present Value of fund at the end of 4^th year = [withdrawl amount of 4h year] + [withdrawl amount start from 5^th year * PVAF @ 11% for 5 years]

     = [26800] + [26800 * 3.69590]

= 124850.12

Present Value of Fund today = PV of fund at the end of 4^th year * PVIF for 4^th year

     = 124850.12 * 0.65873

   = 82242.52

(2) Loan today = 20780

   Repayment = 6 installments

Loan today = Present value of 6 installments

20780 = 5054.23 * PVAF for 6 years

PVAF = 4.11141

At 12 % PVAF = 4.11141

Hence Interest Rate = 12 %