Alice has $5 000 now. She wants to save $25 000 to buy her first car. She decides to put that $5 000 in an investment fund that pays an interest rate of 10% per annum (per year), compounding annually. Required: a) How long does Alice need to wait until she has saved $25 000? (2 marks) 

b) If Alice wishes to have that $25 000 in five (5) years, how much does she need to put into the investment now with the same interest rate of 10%? (2 marks)

c) Assume that Alice was offered an alternative investment, which requires an initial investment of $6 000 for seven (7) years. Calculate the amount of money that Alice would accumulate after seven (7) years, if the rate of return is 12%, compounding quarterly. (2 marks) 

d) Assume that Alice was offered two (2) other alternative investments in the securities market:

 i. Option A pays an interest rate of 10% p.a. (per year), compounding semiannually. 

ii. Option B pays an interest rate of 9.87%, compounding monthly. Which option (A or B) should Alice choose? (2 marks) 

e) Assume that Alice has achieved her goal of $25 000 as a deposit and now she wants to purchase a car that costs $45 000. Her plan is to pay $25 000 in cash and finance the balance over three (3) years at an interest rate of 3.5%. What will be her monthly payment? 

f) At the end of this year, Alice will receive a fixed income of $10,000 each year forever. If the required rate of return is 14%, what is the present value of this income flow?

Answer rating: 100% (QA)

a To find out how long Alice needs to wait until she has saved 25000 we can use the formula for compound interest Future Value Present Value 1 Interest RateTime Where Future Value 25000 desired saving... View the full answer