Question

1.You have a loan outstanding. It requires making three annual payments of $ 4,000 each at the end of the next three years. Your bank has offered to restructure the loan so that instead of making the three payments as originally agreed, you will make only one final payment in three years. If the interest rate on the loan is 4 %, what final payment will the bank require you to make so that it is indifferent to the two forms of payment?

The final payment the bank will require you to make is ​$........ ​(Round to the nearest​ dollar.)

2. You want to endow a scholarship that will pay $ 12,000 per year forever, starting one year from now. If the school's endowment discount rate is 6 %, what amount must you donate to endow the scholarship?

The amount you must donate is $ ...... . (Round to the nearest cent.)

Answer 1

1.Future value of annuity=Annuity[(1+rate)^time period-1]/rate

=4000[(1.04)^3-1]/0.04

=4000*3.1216

=$12486(Approx).

2.Discount rate=Annual cash flows/current value

current value=(12,000/0.06)

=$200,000.