2-Step Problem Solving
Problem Set Number 1
1. Jess would like to have $2,500,000 saved up by the time she retires in 35 years. Her bank account pays a nominal annual rate of 11% interest, compounded quarterly. How much will Jess need to deposit each quarter to reach her goal?
2. Lou & Bud are interested in buying a house. They have $20,000 saved up for a down payment. They would like to keep the monthly loan payment at $1,200 or below, with a 25-year loan. If the bank is lending at a nominal annual interest rate of 7%, compounded monthly, what is the maximum amount they could pay for a house? If the nominal annual interest rate went down to 5% and they secured a 30-year loan, how much would they be able to pay for a house?
3. Sal made a loan of $30,000 to a friend. In return, the friend agreed to make payments of $5,000 per year for 7 years, with the first payment occurring in year 6. Normally, Sal expects a 6% return on investments. Was this a good deal for Sal? Why or why not? If Sal re-negotiated the payment terms, what would you suggest?
4. Zaw County is looking at three different projects. The data for each project can be found in Table 1. The county uses an interest rate of 5% for financial analysis. Based on incremental B/C analysis, which project should be selected?
Table 1. Data for Potential Projects
Project Walking Path Project Bike Exchange Project Splash Fountain
First Cost $250,000 $350,000 $385,000
Annual Expenses $45,000, increase $5,000 per year $60,000, increase 3% per year $60,000, increase by $7,500 per year
Annual Community Benefit $65,000, 5% increase per year $125,000 $175,000, 2% decrease per year
Lifespan 25 years 10 years 15 years
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