Question

Billy Dan and Betty Lou were recently married and want to start saving for their dream home. They expect the house they want will cost approximately $210,000. They hope to be able to purchase the house for cash in 10 years.

To determine the appropriate discount factor(s) using tables, click here to view Tables I, II, III, or IV in the appendix. Alternatively, if you calculate the discount factor(s) using a formula, round to six (6) decimal places before using the factor in the problem.

Required
a. How much will Billy Dan and Betty Lou have to invest each year to purchase their dream home at the end of 10 years? Assume an interest rate of 6 percent. (Round your answer to the nearest dollar amount.)

Annual investment

b. Billy Dan’s parents want to give the couple a substantial wedding gift for the purchase of their future home. How much must Billy Dan’s parents give them now if they are to reach the desired amount of $210,000 in 12 years? Assume an interest rate of 6 percent. (Round your answer to the nearest dollar amount.)

Answer 1

Ans-a)-Billy Dan and Betty Lou want to save $210,000 at the end of 10 years.

Present value of periodic payments=$210,000

Calculation of amount to be invested each year to buy the home for $210,000 in 10 years:-

Annual Investment= $210,000/ PV of Annuity Factor for 10 years @ 6%

Annual Investment= $210,000/ 13.181= $15,932

Annual Investment= $15,932

b)-Calculation of amount to be gifted by the parents to purchase home in 12 years @ interest rate of 6%:-

Present Value= $210,000 * PV Factor for 12 years @6%

Present Value= $210,000 * 4970= $104,370

Present Value= $104,370