Question

You have found your dream home! The sales price you agreed upon is $850,000. You have 20% to use as a down payment and will finance the rest over a 30 year period at a rate of 3.75%. How much will your monthly payments be? You are the CFO of your company, the CEO has decided that the company has outgrown its Head Quarters. The CEO wants to move in 5 years and anticipates the move will cost $1,700,000. How much money does he need to set aside today to have the money to move assuming a rate of return of 5%? You decide to stop drinking coffee and set aside the cost savings for your future, you estimate you will be able to put aside $100 per month, assuming a rate of 9% how much will you have in 10 years?

Answer 1

Answer 1
Calculation of monthly payment
We can use the present value of annuity formula to calculate the monthly payment on home finance.
Present value of annuity = P x {[1 - (1+r)^-n]/r}
Present value of annuity = loan amount = $850000 x 80% = $680000
P = monthly payment = ?
r = monthly interest rate = 3.75%/12 = 0.003125
n = number of monthly payments = 30 years x 12 = 360
680000 = P x {[1 - (1+0.003125)^-360]/0.003125}
680000 = P x 215.9288
P = 3149.19
Your monthly payment be $3,149.19
Answer 2
Calculation of the money does CEO need to set aside today to have the money to move.
We can use the Future value of lumsum formula to calculate the money required to set aside today.
Future value of lumsum = P x (1+r)^n
Future value of lumsum = amount required 5 years from today = $1700000
P = amount required to set aside today = ?
r = rate of return per year = 5%
n = number of years = 5
1700000 = P x (1+0.05)^5
P = 1700000 / 1.276282
P = 1331994.48
$13,31,994.48 need to set aside today by CEO.
Answer 3
Calculation of amount of savings you have in 10 years.
We can use the Future value of annuity formula to calculate the accumulated amount in 10 years.
Future value of annuity = P x {[(1+r)^n -1]/r}
Future value of annuity = accumulated amount in 10 years = ?
P = monthly amount set aside = $100
r = rate of return per month = 9%/12 = 0.0075
n = number of monthly savings = 10 years x 12 = 120
Future value of annuity = 100 x {[(1+0.0075)^120 -1]/0.0075}
Future value of annuity = 100 x 193.5143
Future value of annuity = 19351.43
You will have $19,351.43 in 10 years.