1) Congratulations! You have just won a small lottery. Lottery officials give you three alternatives for receiving your winnings:

a) $8000 now

b) $1000 per year for 12 years

c) $15000 in 10 years

If you can earn 6.5% on your money, which alternative should you choose?

2) Uncle Sam has just taken out a 15 year fixed rate mortgage in the U.S. The amount of the note is $200,000 at 7% per annum. What is the amount of the monthly payment?

3) You wish to establish a permanent scholarship at Birzeit University providing a worthy student with $1000 annually. If invested monies generate an 8% return, how much is needed in the scholarship fund?

4) A five year $10 000 loan requires $2770 annual payments. What is the interest rate?

5) Today is Stanley’s 55th birthday. He plans to retire on his 65^th and wants to put aside" the same sum of money every birthday (starting now) up to and including his 65th birthday. He then wants to be able to withdraw $10 000 every birthday (starting with his 66 ^th) up to and including his 85 ^th birthday. He believes that an interest rate of 10% per year is reasonable. How much does he need to put aside each birthday?

6) Luke borrows $200 000 from a bank to set up a medical practice. He agrees to pay a fixed interest rate of 18.48% per year (calculated monthly) and to repay by equal monthly instalments over 10 years. Calculate the monthly payment and breakdown the first two payments into interest and principal components. Also, how does the last payment breakdown?

Answer rating: 100% (QA)

SOLUTION 1 To determine which alternative to choose we need to calculate the present value of each option and compare them a 8000 now The present value of 8000 is 8000 since it is received immediately ... View the full answer