1 A store offers two payment plans Under the instalment plan, you

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1. A store offers two payment plans. Under the instalment

plan, you pay twenty percent down and twenty percent of

the purchase price in each of the next four years. If you

pay the entire bill immediately, you can take a five percent

discount from the purchase price. If you can borrow funds

from a bank at four percent, which is the better deal? Hint:

it helps to assume certain purchase price, say, $1,000.

Explain how did you get answer.

2. A cash-strapped young professional offers to buy your

car with four, equal annual payments of $3,000, beginning

three years from today. Assuming you\'re indifferent to

cash versus credit, that you can invest at two percent

(effective annual rate), and you think the car is worth

$11,000, should you accept?

3. Your annual pension plan withdrawals in retirement will

be half of your annual salary of $100,000, or $50,000. You

will draw thirty pension plan checks in retirement. Rate of

return on pension plan investments is four percent.

Assuming you and your employer will contribute to your

pension plan for thirty years, what is the amount of annual

contribution need to fund the plan? Solve the problem

using annuity formulas.

Solution

1. Under installment

Present value = 20% * $1,000 + 20% * $1,000 * [1 - (1 +

4%)-4] / 4%

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1. A store offers two payment plans. Under the instalment plan, you pay twenty percent down and twenty percent of the purchase price in each of the next four years. If you pay the entire bill immediately, you can take a five percent discount from the purchase price. If you can borrow funds from a bank at four percent, which is the better deal? Hint: it helps to assume certain purchase price, say, $1,000. Explain how did you get answer. 2. A cash-strapped young professional offers to buy your car with four, equal annual payments of $3,000, beginning three years from today. Assuming you \'re ind ...
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