Finance : Simple and Compound Interest, Buying Land, Advantages of Waiting to Buy Land
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2. Legan Company borrowed $15,280 at 16 1/2% for 12 years. How much simple interest did the company pay? What was the total amount paid back?
3. For each of the following problems, find 1) the ordinary interest using ordinary time, 2) the exact interest using exact time, and 3) the ordinary interest using exact time. Round answers to the nearest cent.
a. $5,000 at 17% annually for 90 days.
Answers: 1) 2) 3)
b. A loan of $4,225 at 8% annually made on March 5 and due on May 5 of the same year.
Answers: 1) 2) 3)
4. One real estate sales technique is to encourage customers or clients to buy today because the value of the property will probably increase during the next few years. "Buy this lot today for $30,000. In two years, I project it will sell for $32,500." Let's see if this is a wise investment.
In two years the future value is projected to be $32,500. If the interest rate is 12%, compounded annually, what amount should you invest today to have the $32,500 in two years.
Using Table 10-3 in your textbook, the factor for 12% and two periods is 0.79719.
Present value = $32,500 X 0.79719 = $25,908.68.
By investing only $25,908.68 today at 12% for two years, you will have the $32,500 needed to purchase the land. You have actually paid only $25,908.68 for the lot, a savings of $4,091.32 on the $30,000 price. Of course, there can be problems with waiting to buy.
a. What are some of the problems with waiting to buy the land? Answer:
b. What are some of the advantages of waiting? Answer:
c. Lots in a new subdivision see for $15,600. If you invest your money today in an account earning 8% quarterly, how much will the lot actually cost you in a year assuming the price does not go up? Answer:
How much do you save? Answer:
d. 1) You have inherited $60,000 and plan to buy a home. If you invest the $60,000 today at 10% compounded annually, how much could you spend on the house in one year? Answer:
2) If you intend to spend $60,000 on a house in one year, how much of your inheritance should you invest today at 10%, compounded annually?
Answer: How much do you have left to spend on a car? Answer:
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I've left all computations to you, but I've written out the relevant formulas.
2. Simple interest is obtained by applying the interest rate only to the principal amount.
Thus, the simple interest paid is $15,280 * 0.165 * 12 = .
For compound interest, compounded annually, the total amount owed after n years is:
P(1+r)^n where P = principal, r = annual interest rate, n = number of years.
Thus the total amount paid back was ...
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