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4 What annual payment is required to pay off a loan of $5,000 at 5% in 4 (A) (B) (C) (D) $1,250.00 $1,410.06 $1,650.56 There is not enough information for me to give an answer 5 For problem 4 above, what is the balance at the end of year 4? (A) $5,000.00 (B) $3,839.94 (C) $2,621.88 (D) $0 6 You are considering investing in a company that makes cell phones. It will take three years for the business to sell its first product. You can expect to make $600k in years 3, 4, 5 and 6. Your return on alternative investments is 6%. How much can you afford to invest . (A) $2.4 million (B) $1.85 million (C) $1.75 million (D) You should not buy the business at any price
Expert Answer
4.
$5000=Annual payments*Present value of annuity factor(5%,4)
$5000=Annual payments*3.546(Approx)
Hence
Annual payments=$5000/3.546
=$1410.06(Approx)(B).
2.Balance at end of year 4=$0.(D).
3.
Present value=Annual inflows*Present value of discounting factor(rate%,time period)
=600,000/1.06^3+600,000/1.06^4+600,000/1.06^5+600,000/1.06^6
=$1.85 million(Approx)(B).
