Question

Sami wants to purchase a car and he needs to borrow $60,000 to be paid off in equal annual payments over 10 years period. The interest rate is 12% compounded monthly. The expected annual inflation rate is 5% for the following 20 years. What is the constant dollar value of the payment at end of year 4. Answers: A)13,270.19 B)8,981.79 C)10,917.42 D)7,131.28

Answer 1

ANSWER

CORRECT OPTION(B)= $ 8,981.79

Amount = $ 60,000

Interest rate = 12% compounded monthly

Effective rate = (1+0.12/12)^12 -1 = 0.12682 per year

Annual payment = 60,000(A/P,12.68%,10)

= 60,000 × 0.181957

= $ 10,917.42

The amount calculated is actual cash flow = $ 10,917.42

Constant dollar cash flow in year 4 = 10,917.42(P/F,5%,4)

= 10,917.42 × 1.05^(-4)

= $ 8,981.79

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