Question

1. Skeeter bought a new bass boat for $22,000. He made a $4,000 down payment and financed the remainder at 14.5% for two years with monthly payments. Required:

a. Prepare a loan amortization schedule for the first three payment periods.

b. How much interest will Skeeter pay, assuming he pays the loan off according to schedule?

c. How much will he owe immediately after making the thirteenth (13th) payment

2. Daniel is considering an investment that will pay $25,000 per year for ten years, plus $245,000 at the end of the tenth year. The investment costs $315,000. Given a RRR of 15%, evaluate this investment by both the PV and IRR approaches.

3. Michael will retire in 16 years. He plans to contribute $4,000 per quarter into an investment account that he expects to earn 8% annually. Upon retirement, he wants to withdraw $10,000 per month in annuity form for 20 years.  Will he be able to accomplish his retirement goals?

There are several ways to approach this problem, but let’s assume you choose to solve for the maximum monthly payments he can withdraw during retirement, and compare that amount to the $10,000 desired withdrawal. Show work and explain.

4. A business venture is expected to require a $25,000 outlay at its inception, then to provide positive cash flows as shown below. Given a 16% RRR, is it a good investment?

Year                            1                      2                      3                      4                      5         

Incremental CFAT $12,500          $16,000         $28,600            $25,500          $33,000    

5. A bond issued by Fortis Corp. will pay the owner $50 every six months for 12 years, plus $1,000 at the end of 12 years. If the appropriate RRR for this bond is 9%, what is it worth?

Answer 1

Amount financed by Skeeter = $22000- $4000 = $18000

Monthly interest rate = 14.5%/12 =0.012083

Monthly installment (A) is given by

A/0.012083*(1-1/1.012083^24) = 18000

=> A =868.49

a) Loan Amortisation schedule is as given below

Period	Loan At beginning of period	Interest on loan	Payment	Loan at end of period
1	18000	217.5	868.49	17349.01
2	17349.01	209.6339	868.49	16690.15
3	16690.15	201.6727	868.49	16023.34
4	16023.34	193.6153	868.49	15348.46

b) Total Amount paid on loan = 868.49*24 = $20843.75

So, Interest paid = 20843.75 -18000 = $2843.75

c) Loan Amount after 13th payment = vaue of loan remaining loan (11 payments)

= 868.49/0.012083*(1-1/1.012083^11)

= $8895.55