Assignment 2

1. Archway Computer advertises a $1,499 notebook computer that you can take home with no money down in exchange for end of the month payments of $42 at 14.9% APR. How many monthly payments would you have to make to pay off this $1,499 loan (round your answer up to the nearest month)?

Financial Management FGM105 Assignment 1 (Due by September 13, 2016) Please solve the following questions. You should work in a group in completing this assignment. Each group will turn in one solution to the assignment and everyone in the group will receive the same grade on the assignment. Please make sure that you write down the names of all of your group members. If more than one group works together and turns in, substantially, the same work, this violates the rules of the course and the rules on academic integrity, and penalties will be assessed. Please show all the intermediate steps and calculations when solving the problems and state your assumptions (if any). Please type your answers. In TVM questions, you should include Time line, corresponding equations, and the values you input for your EXCEL or Financial Calculator computations. 1. In 1941, Montgomery Burns stole a one billion dollar bill from the US Treasury. How much money would Mr. Burns have today in 2003 if he had invested the billion dollar bill at 6% interest compounded annually? 2. Chief Wiggums wants to retire in 15 years and buy a donut shop. He estimates $60,000 will be needed in 15 years as seed money to buy his donut shop. How much will Chief Wiggums need to deposit in the form of equal annual deposits at the end of each of the 15 years at 6.5% compounded annually in order to reach his goal? 3. Marge Simpson plans to skim money from Homer's secret donut and beer jar and invest it in an IRA fund. After a month, Marge discovers she can take $150 a month from Homer's jar without him noticing. Marge would like to deposit this $150 at the end of each month for 20 years with the goal of accumulating $100,000. What nominal annual rate of return (APR or quoted annual rate) must Marge earn to achieve her goal? 4. Archway Computer advertises a $1,499 notebook computer that you can take home with no money down in exchange for end of the month payments of $42 at 14.9% APR. How many monthly payments would you have to make to pay off this $1,499 loan (round your answer up to the nearest month)? 5. Kia is offering customers their choice of 0.9% APR financing for 60 months or $1,500 cash back price reduction on a $14,000 car. What APR with the $1,500 cash back price reduction option would you need to be indifferent between the two options if you plan to put down no additional money toward the car's $14,000 purchase price? 1 6. Mr. and Mrs. MBA are planning to purchase a $200,000 house and have $40,000 as a down payment towards their purchase. The MBAs are considering two 30-year home mortgage loan options. The first option is 6.25% APR financing with no points. The second option is 5.9% APR financing that requires 1.5% (or 1.5 points) of the loan amount be paid up front in order to secure this lower finance rate for the entire needed loan amount. (If the MBAs decide to go with the second option, they would pay the 1.5 points up front on top of their down payment.) Answer the following: (a) What is the MBAs monthly payment for each loan? (b) Ignoring the time value of money, how many months would the MBAs have to stay in their house to break even on the points they would pay on the second loan option vs. the no-point first loan option? 7. Bill Gates wants to set up a trust fund that would start making 30 annual payments to his son Micro with the first payment 18 years from today. The first ten payments will be $50 million a year, the second ten payments will be $100 million a year, and the last 10 payments will be $200 million a year. How much would Bill Gates have to deposit today at 10% compounded annually in order to fund these future trust fund payments? 8. Frieda Finance, age 25, wants to do some retirement planning. Frieda plans on working for 40 more years, retiring at age 65, and then living 22 more years until 87. She wants to start withdrawing a 22-year retirement annuity at age 65 with the first withdrawal at age 65. She wants the annual annuity withdrawal at age 65 to have the equivalent purchasing power of $50,000 today (age 25), and she is expecting a 3.5% inflation rate compounded annually between now and retirement at age 65. Also, in addition to her retirement annuity, Frieda wants to provide $250,000 at age 73 to help pay the college costs of any future grandchildren. Frieda plans to fund this plans by making 40 equal annual deposits beginning today in an IRA with an expected annual interest rate of 10% compounded annually; she also expects the account to earn this same rate after retirement. Answer the following: (a) What will be Frieda's annual annuity withdrawal? (b) How much will Frieda need at age 65 to fund her retirement annuity and grandchildren college fund gift? (c) How large does Frieda annual savings deposit need to be? 9. You and your spouse just had a baby. Ecstatic with the outstanding education you received at the CWRU, you want to send baby to college in 18 years and be able to pay for the baby's college education. You need to estimate cost of each year of college (you're only paying for the 4 years necessary to complete a bachelor's degree) for when your baby starts college 18 years from today. Also, you want to estimate how much you need to save in order to be able to pay these future college costs. Here are some assumptions to help you with your analysis. You want your baby to enjoy the same quality education at the CRWU that you received. The current annual cost estimate to cover all student expenses at the CRWU today is $22,000. You anticipate that college costs will continue to rise at the recent college cost inflation rate 2 of 5 percent annually. Your baby will need annual college money at the beginning of each year. This means 4 withdrawals from baby's college fund at the beginning of her freshman year (18 years from today), sophomore year, junior year, and senior year. Any money saved in baby's college fund will earn an after-tax return of 8.5 percent annually. The balance of baby's college fund should be zero after the withdrawal at the beginning of baby's senior year of college (21 years from today). Answer the following questions to help finalize your savings goals for baby's college fund. (a) What will be the expected cost of each year of baby's college? (b) One way you can fund your baby's future college costs (from the previous question) is by making a single deposit today in the college fund that pays an 8.5% annual rate. How large of a deposit do you need to make today? (c) After determining the single deposit that you would need to make from the last question and sharing it with the grandparents, you get sticker shock and decide that is too much to handle all at once today. To help you get started, the grandparents decide to deposit $2,000 today in baby's college fund. You decide to cover the rest of baby's future college costs by making 18 annual equal deposits at 8.5% into baby's college fund starting a year from today (the last deposit will be made when your baby starts college). How large does this annual deposit need to be in addition to the grandparents' $2,000 initial gift to baby's college fund? 3