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Present Value Calculations for Loans

This document contains 6 problems related to calculating present and future values of cash flows using the financial calculator. It provides the inputs and calculations for problems involving determining the present value of a stream of payments from a grandmother, calculating how much can be borrowed for a car loan, finding the present value of annual payments over 7 years, and calculating the present value of an annuity. It also shows how to calculate the total interest that would be paid on a 30-year mortgage and determines the annual percentage rate and effective annual rate for different bank savings accounts to identify the best option to maximize interest income.

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Gisel Lopez Felix
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228 views2 pages

Present Value Calculations for Loans

This document contains 6 problems related to calculating present and future values of cash flows using the financial calculator. It provides the inputs and calculations for problems involving determining the present value of a stream of payments from a grandmother, calculating how much can be borrowed for a car loan, finding the present value of annual payments over 7 years, and calculating the present value of an annuity. It also shows how to calculate the total interest that would be paid on a 30-year mortgage and determines the annual percentage rate and effective annual rate for different bank savings accounts to identify the best option to maximize interest income.

Uploaded by

Gisel Lopez Felix
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

MGT 181 Chapter 6 Problem Set

[Link] grandmother is giving you $100 a month for four years while you attend college to earn
your bachelor’s degree. At a 6.0 percent discount rate, what are these payments worth to you on
the day you enter college?
PMT = 100 dollars per month
N = 4 x 12 = 48 months
I/Y = 6 percent discount
P/Y = 12 payments per year

CPT PV = 4,258.03

2. Phil can afford $2003 a month for 5 years for a car loan. If the interest rate is 7.0 percent, how
much can he afford to borrow to purchase a car?
N = 5 x 12 = 60 months
I/Y = 7 percent interest
PMT = -200 dollars per month
P/Y = 12 payments per year

CPT PV = $10,100.40

3. You are scheduled to receive annual payments of $5,000 for each of the next 7 years. The
discount rate is 10 percent. What is the value of these payments?
I/Y = 10
PMT = 5000
N=7
P/Y = 1

CPT PV = $24,342.09

4. You buy an annuity that will pay you $24,000 a year for 20 years. The payments are paid at
the end of each year. What is the value of this annuity today if the discount rate is 8.5 percent?
N = 20
I/Y = 8.5
PMT = 24000
P/Y = 1

CPT PV = $227,120.08

5. You borrow $165,000 to buy a house. The mortgage rate is 4.0 percent and the loan period is
30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement,
how much total interest will you pay?
PV = 165,000
N = 30 x 12 = 360 months
I/V = 4 percent
P/Y = 12 payments per year

CPT PMT = 787.74 so 787.74 x 360 = 283,586.40 is amount paid in over 30 years

Interest can be calculated as $283,586.40 - $165,000


= $118,586.40 is total interest

6. You have $5,600 that you want to use to open a savings account. There are five banks located
in your area. The rates paid by banks A through D, respectively, are given below. What is the
APR and the EAR for each bank? Which bank should you select if your goal is to maximize your
interest income?

Bank A: 4.61 percent, compounded annually


APR = 4.61(1) = 4.61%
For EAR, Nom % = 4.61% and P/YR = 1 so CPT EFF% = 4.61%

Bank B: 4.15 percent, compounded monthly


APR = 4.15(12) = 49.80%
For EAR, Nom% = 4.15% and P/YR = 12 so CPT EFF% = 4.23%

Bank C: 4.57 percent, compounded semi-annually


APR = 4.57(2) = 9.14%
For EAR, Nom% = 4.57% and P/YR = 2 so CPT EFF% = 4.62%

Bank D: 4.25 percent, compounded quarterly


APR = 4.25(4) = 17%
For EAR, Nom% = 4.25% and P/YR = 4 so CPT EFF% = 4.32%

If your goal is to maximize the interest income, you should select Bank C since it generates the
largest EAR at 4.62%. EAR is the actual rate paid (or received) after accounting for
compounding that occurs during the year. The larger it is, the higher the rate of return. Thus,
larger EAR would maximize interest income.

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