# Wake Up and Smell the Coffee!

Topics: Time value of money, Money, Present value Pages: 15 (6061 words) Published: March 13, 2013
Jack Kassab
ID #: 201204830

Khalil Yassine
ID#: 201201037

February 12, 2013
Jack Kassab
ID #: 201204830

Khalil Yassine
ID#: 201201037

February 12, 2013
Lebanese American University (LAU)
EMBA
Wake Up and Smell the Coffee!
Chapter 9 _ Time Value of Money
Lebanese American University (LAU)
EMBA
Wake Up and Smell the Coffee!
Chapter 9 _ Time Value of Money
Chapter 9 |
Time Value of Money|
|
Time Value of Money|

|
Time Value of Money|
|
Time Value of Money|

Chapter 9
Time Value of Money
1- Based on the information provided in Table 1, if the Halls continue making minimum payments on their outstanding debts, how much money will they have left over for all other expenses?

Income = \$ 50.000 + \$ 25.000 = \$ 75.000
Net Income after Taxes = \$ 75.000 – (0.28 * \$75.000) = \$ 54.000/year that is \$ 4500/month Credit card = 3% of card balance=3%*10,000 = \$ 300
Car Loan| |
Term years| 2|
Term months| 24|
Annual Interest Rate| 5.99%|
Monthly Interest Rate| 0.50%|
v| 0.995033126|
v term| 0.8874|
Annuity Val| 22.5652|
Loan Amount| \$ 5,000.00 |
Annual Payment| \$ 2,658.97 |
Car Monthly Payment| \$ 221.58 |
College Loan| |
Term years| 2|
Term months| 24|
Annual Interest Rate| 5.25%|
Monthly Interest Rate| 0.44%|
v| 0.995644057|
v term| 0.9005|
Annuity Val| 22.7358|
Loan Amount| 12,000.00 |
Annual Payment| \$ 6,333.9 |
Monthly Payment| \$ 527.8 |

Monthly Rent = \$ 1,200
Total Gross Income| \$ 6,250.00 |
Total Post Tax Income| \$ 4,500.00 |
| |
Credit Card Payment| \$ (300.00)|
College Loan| \$ (527.8)|
Car Loan| \$ (221.58)|
| |
Rent| \$ (1,200.00)|
| |
Net Monthly Income| \$ 2250.57 |

So what is left from their income for all other expense after minimum payment is \$2250.57

2- How much money will Laura and Marty have to deposit each month ( beginning one month after the child is born and ending on his or her 18th birthday) in order to have enough saved up for their child’s college education. Assume that the yield on investments is 8% per year, college expenses increase at the rate of 4% per year, and that their child will enter college when she turns 18 and will complete the degree in 4 years. Total installments paid = 60 * 1,258.72 = \$ 75,523.20 Future cost of first year of college after 18 years = PV * (1 + i)t =\$ 20.000 * ( 1 + 0.04)18= \$ 40,516.33 Future cost of second year of college after 19 years = PV * (1 + i)t =\$ 20.000 * ( 1 + 0.04)19= \$ 42,136.98 Future cost of third year of college after 20 years = PV * (1 + i)t =\$ 20.000 * ( 1 + 0.04)20= \$ 43,822.46 Future cost of second year of college after 21 years = PV * (1 + i)t =\$ 20.000 * ( 1 + 0.04)21= \$ 45,575.36 The present value of the college expenses at the beginning of the 18th year = PV first year college + PV second year college + PV third year college + PV forth year college. PV first year college = \$ 40,516.33

PV second year college = \$ 42,136.98/(1+ 0.08)= \$ 39,015.72

PV third year college = \$ 43,822.46 * (1+0.08)2= \$ 37,570.69 PV forth year college = \$ 45,575.36 * (1+0.08)3= \$ 36,179.38 So total PV of college at the beginning of the 18th year
= \$ 40,516.33 + \$ 39,015.72 + \$ 37,570.69 + \$ 36,179.38 = \$ 153,282.12 A = FV/[(1+i)t-1]/i \$ 153,282.12[(1 + 0.08/12)216-1]0.08/12 = \$ 319.28 So they should deposit each month \$319.28.

3- How much money will the Halls have to set aside each month so as to have enough saved up for a down payment on the \$ 140.00 house within 12 months? Assume that the closing costs amount to 2% of the loan and that the down payment is 10% of the price. Down payment = 10% of \$ 140.000 = \$ 14.000

Closing costs = 2% of \$ 126.000 = \$ 2.520
So total money needed = \$ 14.000 + \$2.520 = \$ 16.520
A = FV/[(1+i)t-1]/i = \$16.520/[((1+0.08/12)^12-1)/(0.08/12)]= \$1,326.92 So they need to deposit \$...