Question

1.Mr. Bill S. Preston, Esq., purchased a new house for $90,000. He paid $20,000 upfront and agreed to pay the rest over the next 10 years in 10 equal annual payments that include principal payments plus 12 percent compound interest on the unpaid balance. What will these equal payments be? A. Mr. Bill S. Preston, Esq., purchased a new house for $90,000 and paid $20,000 upfront. How much does he need to borrow to purchase the house? $_ (Round to the nearest dollar.)

2.To pay for your child's education, you wish to have accumulated $14,000 at the end of 8 years. To do this, you plan to deposit an equal amount into the bank at the end of each year. If the bank is willing to pay 8 percent compounded annually, how much must you deposit each year to obtain your goal? The amount of money you must deposit each year in order to obtain your goal is $_ (Round to the nearest cent.)

Answer 1

1)

Remaining balance = $90,000 - $20,000 = $70,000

Present value = Annuity * [1 - 1 / ( 1 + r)ⁿ] / r

70,000 = Annuity * [1 - 1 / ( 1 + 0.12)¹⁰] / 0.12

70,000 = Annuity * [1 - 0.321973] / 0.12

70,000 = Annuity * 5.650223

Annuity = $12,388.89

Equal payments will be $12,388.89

He will have to borrow $70,000

2)

Future value = Annuity * [(1 + r)ⁿ - 1] / r

14,000 = Annuity * [(1 + 0.08)⁸ - 1] / 0.08

14,000 = Annuity * 10.636628

Annuity = $1,316.21