Question

please do not use excel

4. You've been saving and saving at 5% (with quarterly compounding), and you finally think you can afford all the items your dream board. You sit down to the following items on your bucket list: • 2 week yoga retreat in Fiji with for $7,500, in two years but you advance pay by one year to secure your spot. You will sponsor your little sister to pursue her ballet dreams. You will assume all her monthly ballet fees of $575 per month for the next five years. You will finally learn how to speak Italian by hiring a private tutor for weekly lessons over the next two years, starting next week. You pay by the lesson and each lesson costs $120. You buy the rarest breed of dog who you name Loki for $5,000, payable upon delivery in 6 months. How does this plan cost today?

Answer 1

You can use financial calculator to solve this easily First calculate the effective annual rate = (1+0.05/4)^4 -1 = 5.09% You want to make an advance payment of 7500 to book a spot in a year, so the present value today will be 75000/(1+0.0509) = 71367.40 Assuming the payment is made at the end of each month, the monthly periodic rate will be = (1+0.0509) ^(1/12) -1 = 0.4146% Monthly payment=575 Periodic interest rate = 0.4146% Number of payments = 12*5 = 60 Use the financial calculator to calculate the PV (present value) 30488.01 Again taking 52 weeks in a year and assuming each payment is made at the end of week, so weekly interest rate would be (1+0.0509)^(1/52) -1 = 0.0955% Weekly payment = 120 Number of payments=52*2 = 104 Periodic interest rate= 0.0955% Use the financial calculator to calculate the PV 11874.87 You will buy a rarest breed of dog for which you make the payment in 6 months 5000/ (1+0.0509)^(1/2) = 4877.41 Total cost of the plan would be = (71367.40 + 30488.01 + 11874.87 +4877.41) = 118607.69