Chapter 5, Solutions Cornett, Adair, and Nofsinger

LG15-40 Future Value Given a 9 percent interest rate, compute the year 6 future value if deposits of $1,500 and $2,500 are made in years 2, and 3, respectively, and a withdrawal of $700 is made in year 5.

Use equation 5-1:

FV = $1,500 × (1 + 0.09)4 + $2,500× (1 + 0.09)3 - $700× (1 + 0.09)1 = $2,117.37 + $3,237.57 – $763 = $4,591.94

LG45-41 Low Financing or Cash Back? A car company is offering a choice of deals. You

LG9 can receive $500 cash back on the purchase, or a 3 percent APR, 4-year loan. The price of the car is $15,000 and you could obtain a 4-year loan from your credit union, at 7 percent APR. Which deal is cheaper?

Compare two cases. The first case is to elect the 3% APR and fully finance $15,000 over 48 months. Using equation 5-9, the payment under this scenario would be:

The second case is to take the $500 cash back, apply it to the purchase and finance only $14,500 through your credit union at 7%. The payment under this scenario would be:

The lower payment represents the more advantageous scenario that you should choose, electing the 3% financing through the car dealer.

LG45-42 Low Financing or Cash Back? A car company is offering a choice of deals. You

LG9 can receive $1,000 cash back on the purchase, or a 2 percent APR, 5-year loan. The price of the car is $20,000 and you could obtain a 5-year loan from your credit union, at 7 percent APR. Which deal is cheaper?

Compare two cases. The first case is to elect the 2% APR and fully finance $20,000 over 60 months. Using equation 5-9, the payment under this scenario would be: