Question

11 TER o Paste E Formatas Table BIU GA Number 2. Cal Styles 29 fox с D E 16) Once the Wilsons are settled in their new home, they consider making an investment in a commercial real estate property. The investment is expected to pay $750 at the end of each month for the next 8 years. They believe that a reasonable return on the investment is 15% compounded monthly. (9 points) a. How much should they pay for the investment? b. What will be the total sum of cash the Wilsons will receive over the next 8 years? What is the difference between a and b called?

Answer 1

Investment is expected to pay $750 at the end of each month.

Calculating the Present value of the periodic payment to be received:-

[1 – (1 + r)"] PresentValue = C* 7

Where, C= Periodic Payments = $750

r = Periodic Interest rate =15%/12 =1.25%

n= no of periods = 8 years*12 = 96

$Present Value= 750*\frac{[1-(1+0.0125)^{-96}]}{0.0125}$

$Present Value= 750*\frac{[1-0.30344287108]}{0.0125}$

Present Value = $41,793.43

So, Amount wilson should pay for Investment is $41,793.43

b). Total sum of Cash received by wilson = No of Payments*Periodic payments

= 96*$750

= $72,000

c). Difference between part(a) and (b) is called Interest

Interest = $72,000 - $41,793.43

= $30,206.57

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