1. You have been shopping for a new home. You have a choice of financing. You can choose either a $200,000 mortgage at 4.75 percent for 30 years, or a $200,000 mortgage at 3.5 percent for 15 years.

a) Calculate the monthly payment for both the 30-year and 15-year mortgages.

b) Calculate the amount of interest paid over the life of the loan for both mortgages

2. You decide to help I. M. with his analysis. A good fax machine will cost $500 and functions properly for five years. The phone company charges $300 for installing a new line and $60 a month for the line. A new delivery van costs $20,000 and can be financed for 60 months with a $4,000 down payment. I. M.s bank will finance the van at 5.5 percent compounded monthly. You calculated his weighted average cost of capital at 8 percent. You found that a 5-year-old van of this model sells for $5,000. After discussing the business venture with several retired restaurant owners at the local SCORE office, you believe that I. M., after paying his food costs, will increase his breakfast and lunch trade by $2,000 a month. I. M. can hire a part time driver for $600 a month. The vehicle depreciates straight line for five years, or $3,000 per year. I. M. is a sole proprietor and is in a 20 percent tax bracket. You estimate it will cost I. M. $300 a month to pay for maintenance, upkeep, and insurance on the van.

a. If I. M. decides to establish a delivery service and pays for the fax machine in cash, how much cash does he need now? His startup costs are down payment on van, $4,000; phone line installation, $300; fax machine, $500. Total cash required is $4,800.

b. What is the monthly payment for the delivery van? I. M. has to calculate his monthly payment by using the present value of an ordinary annuity after subtracting his down payment of $4,000 from the $20,000 cost to obtain a PV of $16,000. The formula is:

3. Chaneil opens up a Schwab IRA and places $2,000 in his retirement account at the beginning of each year for 10 years. He believes the account will earn 5 percent interest per year, compounded quarterly. How much will he have in his retirement account in 10 years?

4. The city of Bent borrows $48 million by issuing municipal bonds to help build the Arizona Cardinals football stadium. It plans to set up a sinking fund that will repay the loan at the end of 10 years. Assume a 4 percent interest rate per year. What should the city place into the fund at the end of each year to have $48 million in the account to pay back their bondholders?

5. Calculate the monthly mortgage payment made at the beginning of each month on a $100,000 mortgage. The mortgage is for fifteen years and the interest rate is 5.5 percent.

6. Donavan plans to retire at the age of 65 and believes he will live to be 90. Donavan wants to receive an annual retirement payment of $50,000 at the beginning of each year. He sets up a retirement account that is estimated to earn 6 percent annually.

a. How much money must Donavan have in the account when he reaches 65 years old?

b. Donavan is currently 29 years of age. How much must he invest in this account at the end of each year for the next 36 years to have the required amount in his account at age 65?

7. John and Nicole Smith just had a baby. They heard that the cost of providing a college education for this baby will be $100,000 in 18 years. John normally receives a Christmas bonus of $4,000 every year in the paycheck prior to Christmas. He read that a good stock mutual fund should pay him an average of 10 percent per year. John and Nicole want to make sure their son has $100,000 for college. Consider each of the following questions.

a. How much does John have to invest in this mutual fund at the end of each year to have $100,000 in 18 years?

b. If the bonus is not paid until the first of the year, how much does John have to invest at the beginning of each year to have $100,000 in 18 years

c. Johns father said he would provide for his grandsons education. He puts $10,000 in a government bond that pays 3 percent interest. His dad said this should be enough. Do you agree?

d. If Nicole has a savings account worth $50,000, how much must she withdraw from savings and set aside in this mutual fund to have the $100,000 for her sons education in 18 years?

Nicole is going to take money out of her savings account and set it aside in the mutual fund that will grow to $100,000.

e. If Nicole has been advised to keep the $50,000 in her savings account earning 4 percent compounded monthly, how much additional money will she have to set aside in the stock mutual fund to have the $100,000 for her sons education in 18 years?

8. The RNP Depot Co. is currently considering the purchase of a new machine that would increase the speed of manufacturing electronic equipment and save money. The net cost of the new machine is $66,000. The annual cash flows have the following projections:

a. If the cost of capital is 10 percent find the following , Calculate PVB and NPV

b. IRR and Payback

c. PI

9. Honeywell wants to buy a new computer for her business for Internet access on a cable modem. The computer system cost is $5,100. The cable company charges $200 (including the cable modem) for installation and has a $50 a month usage fee for business, paid at the end of the month. Honeywell expects to buy the system with a $100 down payment, financing the balance at 8 percent over the next 4 years. She will sell the computer for $1,000 when she upgrades. She expects a $500 a month increase in cash flow and is in the 25 percent tax bracket.

a. The start-up costs are ______________.

b. The PVC is ___________.

c. The PVB is ________________.

d. The monthly payment for the computer is _____

10. Loxley Brown is considering the purchase of a beauty salon. The initial cost of this purchase is $16,000. The after-tax cash flows from this investment should be $4,000 per year for the next 5 years. His opportunity cost of capital is 10 percent. Please calculate the following:

a) Payback

b) The present value of the benefits (PVB)

c) The present value of the costs (PVC).

d) The net present value (NPV)

e) Profitability index (PI)

f) Internal rate of return (IRR) (Hint: use interpolation)--Should Manny buy the beauty salon based on IRR rules?

g) Accounting rate of return (ARR)