Reference no: EM132670808
You've always wanted to buy a mint condition 1965 K-code Mustang Coupe. Unfortunately, that is an expensive desire, as the current price tag on such a car is $60,000. Further, you only anticipate it will increase in value. Specifically, you anticipate it increasing by 3% a year.
Problem 1: You have $20,000 right now, and will immediately invest that for the eventual purchase, but you will obviously have to make additional investments if you don't want to wait your whole life. In fact, your goal is to buy as a present to yourself when you turn 30, which you can assume is exactly 8 years from now. If you can earn 6%, compounded monthly on invested monies, how much (in addition to the $20,000 right now) must you invest each month to reach your goal?
Problem 2: Suppose you represent a company that is looking to buy another (smaller) competitor. Your job is to "price" or value this company as it currently sits. You will do so by analyzing the expected cash flows that firm will produce over the next 5 years. Your best guess is that the firm will generate cash flows of $80,000 and $75,000 in years 1 and 2, respectively, and then $50,000 in each of years 3-5. With an assumed APR of 6%, compounded annually, what current value would you assign?
Problem 3: You are buying your first new home. The home has a price tag of $300,000. You are debating the options of financing the home. You currently have $25,000 in your savings account that you could potentially use as a down payment. You must, at a minimum, pay 3.5% down, so the decision is whether to use the remainder. Doing so would remove your next egg, but would also allow you to get a better interest rate. If you did so, you would also have a shorter mortgage and pay it off faster. Specifically, you have the following two options:
Option 1: Pay the minimum of 3.5% down and finance the rest at a rate of 5.5%, compounded monthly for 30 years.
Option 2: Use all $25,000 as a down payment and finance the rest at a rate of 4.8%, compounded monthly for 20 years.
How much less in interest would you pay with Option 2 than with Option 1?