Question

1) You plan to deposit $2000 each year into an account for the next 5 years. The discount rate is 12% for the next 3 years and 15% after that. What is the value today of your 5 deposits of $2000 each?

2) An investment pays no cash flows for the next 3 years. After three years, the investment pays $1000 per year for 10 years. After that, the investment pays $2000 per year forever. The appropriate discount rate is 10%. What is the investment worth today?

3) You wish to purchase a car and can borrow at a 4% interest rate, compounded monthly. You can afford a car payment of $550 each month for the next five years. How much can you borrow?

4) You wish to have $50,000 to make a down payment on a house in 4 years. How much do you have to put TODAY into an account that earns 9%, compounded quarterly?

Answer 1

(1) Annual Deposits = $ 2000 (end of year), Discount Rates = 12 % for the first 3 years and 15% for the next 2 years, Deposit Tenure = 5years

Total Present Value of Annual Deposits = 2000 x (1/0.12) x [1-{1/(1.12)^(3)}] + 2000 x (1/0.15) x [1-{1/(1.15)^(2)}] x [1/(1.12)^(3)] = $ 10589.4

NOTE: Please raise a separate query for the solution to the second unrelated question as one query is restricted to the solution of only one complete question with up to four sub-parts.