Question & Answer: 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…..

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

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Question & Answer: 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…..
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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).