Question

Please show steps to solution using a FINANCIAL CALCULATOR

a. Calculate the present value of an annuity due which pays 500 every year for the next five years, if the interest rate is 5%.

b. You recently got promoted at your job. You have since decided to buy your dream car which costs $97,000. The car dealer tells you to pay 11,000 at the end of every year for the next 7 years after which you can take possession of the car at t=7. Given a market interest rate of 13%, is this a good deal?

Answer 1

HI,

Answer,

1)

YEAR	Annuity	PVF @ 5%	DCF
1	500	0.952381	476.1905
2	500	0.907029	453.5147
3	500	0.863838	431.9188
4	500	0.822702	411.3512
5	500	0.783526	391.7631
Present Value	2164.738

To find out the answer in fin calc,follow these steps,

1.Type 1/1.05

2.Press = symbol 5 times

3.Press GT function

4.Multiply with the annuity i.e,500

2)Lets check the present value of cashoutflow to take the decision,

YEAR	Payment	PVF @ 13%	DCF
1	11000	0.884956	9734.513
2	11000	0.783147	8614.614
3	11000	0.69305	7623.552
4	11000	0.613319	6746.506
5	11000	0.54276	5970.359
6	11000	0.480319	5283.504
7	11000	0.425061	4675.667
Present Value	48648.71

Since the Present value of the annuity paid is less than the cost of vehicle we can go for this deal.

Steps in Fin calculator,

1.Type 1/1.13

2.Press = symbol 7 times

3.Press GT function

4.Multiply with the annuity i.e,11,000