1. Omar and Destiny are saving for their daughter Nevaeh's college education. Nevaeh just turned 10 (at t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and expenses at State U. are currently $14,000 a year, but they are expected to increase at a rate of 3.0% a year. Nevaeh should graduate in 4 years--if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11). So far, Omar and Destiny have accumulated $12,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional $4,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Nevaeh's anticipated college costs?
2.
Suppose you just won the state lottery, and you have a choice between receiving $2,825,000 today or a 20-year annuity of $240,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.
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3. You plan to borrow $40,500 at an 8.0% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2? |