Question

Q1-Assume you have a total of $49,500 to invest and want to receive an annuity of $7,200 for 20 years. What interest rate do you have to earn on the $49,500 investment in order to receive the annual payments? (Round your answer to 2 decimal places. For example, enter .1234 as 12.34)

Q2-

Larry Davis borrows $88,000 at 12 percent interest toward the purchase of a home. His mortgage is for 30 years.

a. If Larry decides to make annual payments, how much will they be? (Enter your answer as a positive number rounded to 2 decimal places.)
  

b. How much interest will he pay over the life of the loan? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

please help me

  

Answer 1

Solution 1:

Total investment = $49,500

Annual cash inflows = $7,200

Period = 20 year

Let interest rate earned in i

Now present value of annuity at i rate = $49,500

$7,200 * cumulative PV factor at i for 20 periods = $49,500

cumulative PV factor at i for 20 periods = 6.875

Refer PV Table, this PV factor falls between interest rate 13% to 14%

Cumulative PV factor at 13% = 7.024752

Cumulative PV Factor at 14% = 6.623131

Interest rate = 13% + (7.024752 - 6.875) / (7.024752 - 6.623131)

= 13.37%

Solution 2a:

Loan amount = $88,000

Interest rate = 12%

Period = 30 years

Annual payment = Loan amount / Cumulative PV factor at 12% for 30 periods

= $88,000 / 8.055184 = $10,924.64

Solution 2b:

Total payment over the life of loan = $10,924.64 * 30 = $327,739.20

Loan amount = $88,000

Interest will be paid over the life of the loan = $327,739.20 - $88,000 = $239,739.20