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Question 2: Application of Time Value of Money (25 marks) a) You are planning to buy a car worth $20,000. Which of the two deals
Question 2: Application of Time Value of Money (25 marks) a) You are planning to buy a car worth $20,000. Which of the two deals described below would you choose, both with a 48-month term? (NB: estimate the monthly payment of each offer). i) the dealer offers to take 10% off the price, then lend you the balance at an annual percentage rate (APR) of 9%, monthly compounding. ii) the dealer offers to lend you $20,000 (i.e. no discount) at an APR of 3%, monthly compounding, (9 marks) b) You have won a lottery worth $1,000,000. The amount will be paid to you in equal installments over 20 years. If the interest rate is 10% compounded annually, how much will you be paid at the end of each year? (6 marks) c) You have just joined the investment banking firm of Mckenzie & Co. They have offered you two different salary arrangements. You can have $75,000 per year for the next two years, or you can have $55,000 per year for the next two years, along with a $30,000 signing bonus today. If the interest rate is 12% compounded monthly, which is a better offer? NB: first convert the annual percentage rate of 12% to EAR and use the EAR as the discount rate. (10 marks)
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