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Your Questions About Annuities Explained

Summer — Thu, 29 Mar 2012 06:07:02 +0000

Richard asks…

Present Value of annuity question?

I need help with the following questions. If you could explain how to calculate the n value that would be great!

1. How much is each payment for an investment of $32 000?
a) an interest rate of 12% per annum, compounded semi-annually, with payments every 6 months, starting in a half year
b) an interest rate of 9.5% per annum, coumpounded monthly, with payment every month starting in a month

2.Find the present value of following
a) a payment of $600 every month for 24 months, starting in month, with interest at 10% per annum, compounded monthly

thanks!

Summer answers:

This is easiest to resolve with Excel or a financial calculator.

Unfortunately, the first question is missing pertinent information. Question 1 appears to be about a life annuity? It is not possible to determine the value of an investment without an estimate of when the principal will be repaid, the term. In a life annuity, principal is repaid over the annuitant’s expected life based on a given mortality table. We do not know the age of the annuitant or the table used. Likewise with a financial investment, we do not know the payment period or tranche structure (for ABS).
1.a) $32,000 x .12 / (12/6) = $1,920 interest only 2x a year
1.b) $32,000 x .095 / (12/1) = $255.33 interest only

2 – Sufficient info exists. PV ( 24 obs, 12 ppy, 600 ppp, .10 rpy) = 13,002.5129

William asks…

please help me solve this annuity problem!!!! asap !!!?

Ms.reema rao deposited rs.9000 at the end of each year in a bank. after 3 years, the amount accumulated was rs.29,790. find the annual rate of compounding.

I KNOW THE FORMULA IS : A = C/i [ ( 1 + i )n - 1 ]

BUT IM CONFUSED HOW DO I EQUATE THE SUM SINCE WE DO NOT HAVE THE VALUE FOR i.
PLEASE SOLVE AND EXPLAIN HOW WE GET THE RATE OF INTEREST …..THANK YOU !!! c:

Summer answers:

The formula i use is : Accumulated amount = P (1 + (R/100))^n , where
P = Principle
R = Rate
n = no of calculation
In this case;
P=9000
R= ?
N=3
Amount = 29,790

therefore,
29790= 9000(1+(R/100))^3
3.31= (1+(R/100))^3
1.49030788 = 1+(R/100)
0.49030788 = R/100
R = 49.03%

Susan asks…

Would senior citizens buy Medicare, final expense, annuity or long term care insurance from an openly gay man?

It was at the the end of a day-long sales training program with a group when one of the business owners piped up, “What we need are some gay guys to sell our merchandise.” She was asked, “Why specifically gay men?”

She answered, “Because when we visited stores yesterday in the City, they were out and willing to tell anyone in a matter-of-fact way. They were personable, fun, you just wanted to buy from them.” I understood from her descriptions of several of these guys why she would want them to work for her.

Expressive gays tend to be extroverts who occasionally tend to make their private business public and sharing information without boundaries. The Expressive is the Grasshopper living for today. Recognized by customers for their uniqueness. Again, their enthusiasm and energy are the spark plugs for your team.

Their enthusiasm can make them feel a bit invincible at times; and can overwhelm Analyticals who want “just the facts.”

Expressive personalities have to process externally while Driver and Analytical personalities don’t. The downside to an Expressives’ natural inclination to show multiple possibilities might require the customer to bring them back to the product the customer is considering, not all of the other possibilities. Their natural enthusiasm can also inflate products’ benefits without devoting time to adequately explaining why.

But I can see how it could easily be confused. An Expressive guy comes out, has to deal with the social ramifications and decide he’s OK with it. Because of coming through that process, there is no baggage so he is free to let himself be open to meeting others. I am okay with me being me. But will the boss and the world be okay with the new me?

That all stems from the basic Expressive personality. In other words, what this owner identified was the personality type that happened to be gay; not a gay person. With me?

The Expressives I think are the most challenging of all the personalities. Their very energy is what keeps many from hiring them. Their creativity, individualism and self-assuredness can be threatening. And when you’re trying to teach them a rigid process your Analtyical employees can easily take to, this personality will constantly challenge why they have to do it “that way.” They will complain their creativity is being stifled – they feel like robots.

What we have to remember is the Expressive is the spark-plug to your crew. They are the one that adds color, excitement and fun.

Is that a gay thing? Or a sales thing?

Should you recruit gay men to sell your stuff? Do yo think business people wold buy6 products and services from a gay guy?

Do women tend to trust gay guys who are expressive? Yes?

You don’t need a lot of Expressives on your sales force but at least one keeps things interesting and fun for your crew and your customers.

My question is selling traditional dry and boring products like insurance, health,Long Term Care in the home. with my french nails, arched brows, sparkly personality do I you think it will work for me or that I am living in a fools paradise and will be received with a thundering thud.

I am not the same as I was a year ago ( In am open now, wasn’t then and there have been hormonal changes too) and I want to reenter the workplace as I am not as I was. What do you think, be nice but be honest. Work places tend to be conservative and traditional and some industries even more so. Help me please !!! LOL Really some thoughtful advice will be appreciated.
I am asking about myself, I am trying to decide what to do career wise. Thanks!

Summer answers:

It’s a sales thing. If you can’t sell, it’s not going to help that you’re gay.

If you CAN sell, it’s going to matter a way lot, where you live. There are lots of liberal, gay seniors, in certain communities of the USA. There are lots of liberal straight seniors, that would get a kick out of a flamboyant, CREDIBLE insurance guy.

If you’re target clientelle is in Mayberry, though, I’d look for something else.

95% of insurance salespeople wash out – regardless of sexual preferences. It’s damn hard work. Plus, you’ve GOT to be credible.

Mark asks…

Would you or senior citizens buy Medicare, life, annuity or long term care insurance from an openly gay man?

Their enthusiasm can make them feel a bit invincible at times; and can overwhelm Analyticals who want “just the facts.”

That all stems from the basic Expressive personality. In other words, what this owner identified was the personality type that happened to be gay; not a gay person. With me?

What we have to remember is the Expressive is the spark-plug to your crew. They are the one that adds color, excitement and fun.

Is that a gay thing? Or a sales thing?

Should you recruit gay men to sell your stuff? Do yo think business people wold buy6 products and services from a gay guy?

Do women tend to trust gay guys who are expressive? Yes?

You don’t need a lot of Expressives on your sales force but at least one keeps things interesting and fun for your crew and your customers.

Really some thoughtful advice will be appreciated.

Summer answers:

Without hesitation. All he (or a gay woman) would have to show me is knowledge of his (or her) product.

Your Questions About Annuities Payments

Summer — Wed, 28 Mar 2012 06:07:03 +0000

Charles asks…

Monthy payments to an account?

Pam is making monthly payments into an annuity. She wants to have $200 in the fund to buy a new convection range in nine months, and the account pays 9.6% annual interest. What are her monthly payments to the account?

Summer answers:

$21.35

Joseph asks…

Are annuity payments awarded in a divorce taxable?

When my parents divorced, my mom was awarded half of his federal civil service retirement. She has been receiving monthly payments. Now she’s received a form CSA 1099R but box 2a says the taxable amount is unknown and the bottom of the form says “taxable amount not determined”. So we don’t know how to report this on her tax return. Is this taxable? The whole thing? Part of it?

Summer answers:

Probably all taxable. If there’s an amount under “Employee Contributions,” you might be able to recover a certain percentage of the payments tax free. In any case, the majority of the payment will be taxable.

David asks…

could someone please help me with my math homework its about annuities?

27. You must borrow $31, 417 to buy a new vehicle.
a) Determine the monthly payments for each of the following:

i) a three year loan at 1.9% interest
ii) a five year loan at 3.9% interest

b) What part is the total amount of interest paid for eacg loan in part a)?
c) Which option in a) is cheaper and by how much?

Summer answers:

Qa(i) ……….. Qb(i) …………………….. Qc
$898.49 ….. $928.64 … Cheaper by $2285.16

qa(ii) ………. Qb(ii)
$577.18 ….. $3213.80

note:
——-
formula used for calculating monthly payments P
= 31417r(1+r)^n / ((1+r)^n – 1)
where r is the monthly interest rate in decimals
& n is the period in months

and formula for calculating interest
= total of monthly payments – loan amount

Thomas asks…

If you win the CA lotto and pick the annuity, can your children inherit the remaining winnings if you die?

Which is better, picking the annuity (26 annual payments) or the lump sum? If you pick the annuity, can you assign beneficiaries (husband, wife, children, etc) such that they can inherit the remaining lotto winnings payments that haven’t been issued yet should you die before the 26 years is over? I’m more curious about California lotto rules (Super Lotto or Mega). Thanks!

Summer answers:

You probably have to will it to them. Annuity payments should be guaranteed money. Its not a “win for life” agreement. You won “X” amount of dollars and it is just for the state’s convienence for them to pay you out in installments. They money is yours, even if you are dead so the next person in line to accept your estate is the one who should get the money.

Maria asks…

Is American Equity Life Insurance Company a company which can be trusted?

American Equity sells fixed annuities, Have they ever defaulted on paying there customers there monthly payments on fixed annuities or any other investment?

Summer answers:

Here are some search results

Sharon asks…

Which home loan would be best for me?

Credit 59?-600

Income $1500 monthly

$10,000 for down payment

75,000 annuity payments over the next 9 years

Will someone give me a loan? Which would be better FHA, VA, or other(traditional) types? Ihave less than two years of employment history.

Summer answers:

Fixed rate, VA if you can get it. All lenders ask the same question, will you be able to pay them back? Are you likely to pay or are you likely to default? The larger the down payment, the less risk to them s you have more at risk yourself. The bigger your risk, the less their risk, the more likely they are to loan you the cash to buy. In a real estate deal, they have NOTHING to lose as they can foreclose and recover the money invested if you default, but at your expense since you lose all you have invested.

Mark asks…

judy is setting up an ordinary annuity that consists of monthly payments(at months end) of $500 per month for?

5 years at a yearly interest rate of 7% compounded monthly. The the future value of this annuity , at the end of 5 years is????

Summer answers:

Let a = 1 + 0.07 / 12.

Then the future value is:
500(a^59 + a^58 + … + a + 1)
= 500(a^60 – 1) / (a – 1)
= 500 * 12[ (1 + 0.07 / 12)^60 - 1) / 0.07 ]
= $35796.45.

Your Questions About Annuities Payments Due

Summer — Tue, 27 Mar 2012 06:07:02 +0000

Lizzie asks…

ENGLISH TO MARATHI TRANSLATION ?

Pl send the following translation into marathi & send me by email.

6) ISSUES – a) Gauge – Is independent of technology & BG exist on IR. & additional safety on curves
b) Width of coach – provides 25% more capacity, and comfort due to better sitting capacity
c) Train length – for a given volume of traffic, reduces capital cost of coaches due to reduction in
numbers, reduces energy cost & O & M cost.
d) Imported Coaches 3 times costly than indigenous coaches . No need to purchase assets for technology.
e) Indigenous coaches – Manufacturing expertise available within the country for BG wider coaches.
7) OTHER ISSUES –a) Curves – BG can negotiate 100m curves – BART metro San Francisco USA
b) Frequency of service – BG can have 2min freq. At present at operated at 3min freq. W&C Rly
– No need to inflate capital cost for adopting ATC & ATO for 3min service
c) Capital cost – 30% lower for equivalent capacity. Cost to be compared per unit carrying capacity.
d) Land Cost – Due to reduction in length of train large saving in depot land & at stations
e) Safety & Comfort – BG provides improved safety and comforts & permits higher speeds on curves Govt. Misguided – a) On technology – Technology is independent of gauge
– BART Metro in San Francisco in USA is on BG with best of the world technology
b) Cost – Cost of BG per unit carrying capacity is lower for BG than that for SG
– Absolute cost of BG is 25% lower due to reduced number of coaches per train for eq. volume
c) Land requirements- BG requires lower cost due to reduced train length for eq. volume
d) No transparency – DPR is not installed on internet nor disclosed to public to avoid comments of deficient, defective, unsafe and abnormally costly imports of technology, though appropriate technology for corresponding requirements of performance are available in the country.
9) Methodology – EPC vs PPP – EPC model with govt. funding is 25-30% economical
•PPP model investor abnormally inflate the cost resulting in 30-50% VGF subsidy
•No VGF subsidy is required for BG with wider coaches for performance at 3min service.
•PPP investor misusage the VGF subsidy for abnormally large payments to int. manufactures for importing coaches
•A mixed PPP model for Rly projects if adopted, should be BOLT/deferred payment/annuity payments for fixed assets and maintenance, while EPC model to be adopted by the govt. for operations & procurement of mobile assets to ensure standardization
•The savings of VGF subsidy to be utilized for setting up of a coach manufacturing unit for BG wider coaches which can be achieved within 2 yrs and less than Rs 1000 crores and within the construction period of 5 yrs, taking into consideration the demand for all new metros within the country. This will achieves standardization of coaches.
10) LEGAL ASPECTS
•Art. 366/22 and art 246 does not permit the state govt. to construct operate and maintain a Rly project, even within a municipal jurisdiction as well as connecting metro systems between two adjoining municipal jurisdiction
•State has no constitutional jurisdiction, to plan construct, operate and maintain, metro rail between PMC & PCMC
•Policy directive issued by MOUD to states, to decide the subject of gauge, is against the provisions of the constitution.
•A.G.’s opinion that metro rail planned within a municipal jurisdiction can be considered as tramway and implemented under the tramways act by the states, is technically and under the IR’s act 1989 & tramways act 1889 is no applicable and his opinion has not been specifically approved by the Law Ministry at the centre. Hence the gazette notification issued by the GOM to implement metro rail under the tramways act is illegal and void under the constitution.
11) CONCLUSION
•The state has no legal jurisdiction under the constitution to connect PMC & PCMC by a metro rail system as planned. This power vests only with the centre and IR
•What we emphasize, is that from considerations of capacity, comfort, safety, and economics, adoption of a BG system, with wider coaches, with 18 tonne axle load and with schedule of dimensions to accommodate wider coaches and a future provision of about 10 to 12 coaches per train, is a must for CBM & future corridors, like in Pune, in public interest and for the future generation of the Mumbai City.
•We should set up

Summer answers:

I think this is an english site…

Chris asks…

What is the future value of a 5-year annuity due that promises to pay you $300 each year? Assume that all paym

What is the future value of a 5-year annuity due that promises to pay you $300 each year? Assume that all payments are reinvested at 7 percent a year, until Year 5.

Summer answers:

1845.987

300* [(1 + 0.07)^5 - 1] / 0.07

Your Questions About Annuities

Summer — Mon, 26 Mar 2012 06:07:02 +0000

Robert asks…

What is the difference between future and present annuities?

Summer answers:

Future is when you give them money either a lump sum
or monthly payment and don’t touch it for seven years.
Then anytime after that you can start withdrawing a
monthly income for life or a set period of time.
Present is when you give them a large sum of money and
then start drawing income monthly for life or a set period
of time.

Your Questions About Annuities Explained

Summer — Sun, 25 Mar 2012 06:07:03 +0000

Chris asks…

What is the net present value of this investment?

Newman Labs is considering buying equipment which would enable the company to obtain a five-year research contract. The specialized equipment costs $650,000 and will have no salvage value when the five-year contract period is over. The estimated annual operating results of the project are as follows:

Revenue / $750,000
Expenses (including straight-line depreciation) / (650,000)
Increase in net income / $100,000

All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.

Refer to the information above. Compute the net present value of this investment, using a discount rate of 12%. (An annuity table shows that the present value of $1 received annually for five years, discounted at 12%, is 3.605.)

A. $468,650.
B. $179,150.
C. $289,500.
D. $829,150.

Hi, I am so confused on how to set this up. There is so much information and I am not sure what to ignore. The problem states the specialized equipment costs of $650,000 will have no value and I think this is the same as the 650,000 in parenthesis that is in the table so I think I ignore that. But I think parenthesis means credit so I am not sure if I add this amount.

I have tried many different calculations using the numbers in the table and multiplying them by 12% but I am not close to any of the options. Can anyone help or explain more? Thank you so much )

Summer answers:

To find the net present values, times the annual cash flows by the discount rate. The annual cash flows will be $230,000. (Net income of $100,000 plus add back the depreciation expense of $130,000 because it is a non-cash expense.) To calculate depreciation you take $650,000 divided by 5 years = 130,000. Since your annual cash flows are $230,000, you need to times that by 3.605 (the present value of an annuity discounted at 12%). I come up with 230,000 * 3.605 = 829,150

Mary asks…

A company must replace its existing furnace system. There are two options. The premium model will cost?

$800,000, have a five year life and reduce annual operating expenses (relative to the old furnace system) after tax by $150,000. The economy model will cost $500,000, have a four-year life and reduce annual operating expenses (relative to the old furnace system) after tax by $100,000. The company anticipates that in either event, the chosen furnace system would continue to be replaced indefinitely. Assume cost of capital is 10%.
Should the company by the premium or economy model? Explain.

What I did was compute the NPVs for both then convert them into EAA and decided the economy model was better as it had a higher EAA. Is this right?? This is a practice mid term question.

I got for my Equivalent Annual Annuity for the economy model -$26795.52. Does this look right??

Thanks in advance.

Summer answers:

Additional details:

Taking premium model out 11 years:
NPV = -$361,550 or -$32,868 EAA.

Taking economy model out 14 years:
NPV – -$367,500 or -$26,250 EAA.

Note: Using this length of time approaches an indefinite period of time.

In this case, the lower negative number is better, so the company should buy the economy model.

Sandy asks…

Math Help ANNUITY!?

Paul Altier bought a rare stamp for his collection.He agreed to pay a lump sum of $4000 after 5 years. Until then, he pays 6% simple interest semiannually on the $4000.

a. Find the amount of each semiannual interest payment.

b. Paul sets up a sinking fund so that enough money will be
present to pay off the $4000. He will make annual payments
into the fund. The account pays 8% compounded annually. Find the amount of each payment.

Please EXPLAIN!!

Summer answers:

A. Paul is paying 6% interest on the $4000 that he owes. This amounts to 0.06 * 4000 = $240 per year. But he’s not paying the interest annually – he’s paying it semiannually (2 payments per year). So every 6 months he will have to pay $240 / 2 = $120.

The answer to a. Is $120.

B. Paul wants to set aside some money each year so that he can pay the $4000 after 5 years. He wants to pay the same amount into his fund each year. He could just set aside $4000 / 5 years = $800 each year meaning that he has put away exactly $4000, but the fund is paying interest at 8% so after 5 years he will end up with more than $4000 in his account. He just wants to save exactly $4000 including interest.

Assuming he puts his first deposit into his sinking fund immediately (meaning that it gets the full 5 years worth of interest on it) – if “a” is the amount he is putting away each year:

His first payment will have 5 years worth of interest at 8% and so after 5 years it will be worth (a * 1.08^5). Similarly his second payment will have 4 years worth of interest (a * 1.08^4), and so on for the other 3 years…

So the following is true:

a * 1.08^5 +
a * 1.08^4 +
a * 1.08^3 +
a * 1.08^2 +
a * 1.08 = $4000

We can re-arrange this to be:

a * (1.08^5 + 1.08^4 + 1.08^3 + 1.08^2 + 1.08) = $4000

We can simplify this to be:

a * (6.335929) = $4000

So a = $4000 / 6.335929

a = $631.32

So your answer to question b is $631.32 per year.

John asks…

Questiona on annuity,please solve it, its urgent, if u r gud at it do ans it as soon as possible.?

Question 1
(a) Ten years ago, to supplement their planned retirement, a couple purchased a 25 year flexible savings plan for a target sum of £75,000, which was projected to grow at an annual equivalent rate (AER) of 8%. The insurance company, having reviewed their plan (as they do normally every 10 years), now inform the couple that they will have to increase their monthly premium as the rate of return has turned out to be lower than expected, or face the prospect of receiving a lump sum well below the target.

(i) Calculate the revised monthly premium for the next 15 years in order to meet the target sum of £75,000, based on a projected AER of 6%. (25%)

(ii) What would be the shortfall in the target sum if the couple continued paying their monthly premium as before, but the plan grows at 6% AER for the first 10 years, and then at 5% AER for the next 15 years? (25%)

(b) A householder takes out a mortgage of £75,000 to be repaid over 25 years at an assumed Annual Percentage Rate (APR) of 6.8 %. What would be the reduction in his monthly repayment if £10,000 of the capital were repaid at the end of 10 years, with a part repayment penalty charge of £199 added to the outstanding balance? (30%)

(c) A student loan company will lend you £5,000 now, repayable in 10 years with interest but the repayments will only start after 3 years when you graduate. What will be the end of year annual repayment for the remaining 7 years if the APR on the loan is 3.6%? (20%)

NB: It is better to perform your initial calculations to 6dp to avoid rounding off errors.
Question 2
(a) Using the present value of a fixed term bond, explain the relationship between the price, the par value and the rate of return on this bond. How do you distinguish between a bond that sells at a premium and a bond that sells at a discount? (20%)

(b) A £100 par value bond has a coupon rate of 8.25 per cent, payable semi-annually on 30 June and 31 December. The bond matures on 31 December 2010. Find the quoted price and the market price of this bond on 16 November 2006, given that the yield to maturity was 8 per cent. (20%)

(c) An investor has a portfolio of three assets. The expected returns, expected standard deviations and the correlation matrix of returns are:

Asset Expected Expected Correlation matrix
Return Stand dev A B C
A 2% 10% A 1.0 0.3 0.4
B 3% 12% B 1.0 0.2
C 4% 14% C 1.0
(i) Calculate the portfolio expected return and standard deviation if each asset constitutes one third of the portfolio. (15%)

(ii) Suggest weightings for the assets that would produce a portfolio with lower risk. Explain what risk is and why it is reduced. (15%)
(iii) Trace out the efficient segment for the above data, explaining how this is obtained. What is the expected return on the least risk portfolio? (30%)
Pls solve the question with steps and formuleas, even you know one part plz do solve it.

Summer answers:

All your home work you want others to solve???

Michael asks…

Help!!!!!!!!!! Evaluating Lump Sums and Annuities….I don’t understand this problem?

Crissie just won the lottery, and she must choose between three award options. She can elect to receive a lump sum today of $61 million, to receive 10 end-of year payments of $9.5 million, or to receive 30 end-of-year payments of $5.5 million.
a). If she thinks she can earn 7% annually, which should she choose?
b). If she expects to earn 8% annually, which is the best choice?
c). If she expects to earn 9% annually, which option would you recommend?
d). Explain how interest rates influence the optimal choice.

Summer answers:

You need to compare the Present Value of each choice, at the 3 rates.

What is the PV of an Annuity of 9.5 mil, N 10, R 7%? It’s 66,724,025.
What is the PV of an Annuity of 5.5 mil, N 30, R 7%? It’s 68,249,727
Or receive 61.0 mil today, its PV. So the best deal is 5.5 mil for 30 yrs.

I assume you know how to get the PV of an Annuity.
Do the same as above, but at 8% and 9%.
Then you’ll see what influence the varying rates have on your decision.

Robert asks…

Math/Finance Question.?

Can somebody pretty please explain to me how to do this problem. I provided the answer to the question at the bottom. You deposit $20 at the end of every three months into an annuity with 4% interest compounded quarterly. How much of the annuity’s value is from interest after 25 years? Do not round until the final answer. Then round to the nearest dollar as needed.
1410-Answer

Summer answers:

Use the Future Value of an Ordinary Annuity equation:
FVoa = PMT [((1 + i)^n - 1) / i], where i = the quarterly rate 0.04/4 = 0.01, n = 25 yrs * 4 qtrs per year = 100, PMT is the quarterly deposit of $20…

FVoa = 20 [(1.01^100) - 1 / 0.01]
= 20 [(2.70481 - 1) / 0.01]
= 20 [170.48138]
= 3,409.63….now subtract your payments to get the amount of interest:…
(20 * 100) = 2,000..interest is 1409.63, round to 1410

Sharon asks…

Explanation of IRR and MARR?

Can somebody explain IRR and MARR.
So IRR is the internal rate of return, so the interest rate required for an investment to break even.
Given, interest rate is the rate of return per dollar, why is an investment considered acceptable if the estimated IRR is higher than the MARR (minimum acceptable rate of return). If IRR is the interest rate or rate of return per dollar spent, why does that rate have to be greater than the MARR to be considered a good investment? Doesn’t that just mean you have to spend more to break even? So far in my course we learn to use MARR as an interest rate when calculating present, future, annuity, etc. worths and compare projects and investments but I don’t fully understand what it means. Could anybody explain the meaning, use, and why IRR and MARR are used the way they are? Thanks

Summer answers:

^
1. MARR (minimum acceptable rate of return): Funds have a cost. The funds consist of equity and borrowing. The entrepreneur first calculates what is the Average Cost of Funds. Based on this average cost, he decides that he will be able to take up a project which offers a certain percentage of “MARR (minimum acceptable rate of return)”.

2. As regards IRR(internal rate of return), it is not correct to say that it is “the interest rate required for an investment to break even”. It is a rate that a project will produce(rather is likely to produce).

3. Therefore, if IRR is higher than the MRR, the entrepreneur will go in for the project.

4. If there are several projects, he will go in for the project with higher IRR.
^

Thomas asks…

Calculating annuity payment [10 PTS!]?

Joe Robertson is a high school sophomore. He currently has $7,500 in a money market account paying 5.65 percent annually. He plans to use this and his savings over the next four years to buy a car at the end of his sophomore year in college. He estimates that the car will cost him $12,000 in four years. How much money should be invest in the money market account every year for the 4 years to meet his target?

PLEASE EXPLAIN. I’m confused on how the 2 money values play into it.

Summer answers:

If you’re doing this manually, it needs to be done in two steps.

Step 1:
Calculate the future value of $7,500
FV = PV ((1 + i)^n)
Where:
FV = Future Value
PV = Present Value (7,500)
i = Interest Rate Per Period (0.0565)
n = Number of Compounding Periods (4)
= $9,344.14

12,000 – 9,344.14 = $2,655.86 this is how much more you need.

Step 2:
Calculate what payment you will need to make each year in order to reach that amount.
Payment = FV / [(((1 + i)^n) - 1 ) / i]
Where:
FV = Future Value (2,655.86)
i = interest per period (0.0565)
n = number of periods (4)
= $610.27