Problem 1:

Dr. Deane wants to save money for the down payment on a house.
His savings plan has the following characteristics:

The amount of the down payment $30,000

The savings interest rate 4%
The number of years to save 8 years
The number of years before savings
starts 4 years

Assume that Dr. Deane will make a deposit in a savings account at the end of every year.

a) Explain what kind of a problem this is, a present value or future value problem.
b) How much must Dr. Deane save every year for this deferred annuity?
Please show all your work starting with the formula in words and symbols.
c) Explain how to find the future value of a deferred annuity in 100 words or less.

Problem 2:

Dr. Deane won the lottery. He has a choice between taking a lump sum today, or
taking
a deferred annuity. The characteristics of the two alternatives are as follows:

Alternative 1:
Lump sum: $15,000

Alternative 2:
Annuity payment per year $3,000 per year
Total number of payments 10 payments
Number of years until the payments begin 6 years
Interest rate 10%

a) Explain what kind of a problem this is, a present value or future value problem.
b
) Which alternative should Dr. Deane choose if he wants to maximize his wealth?
Solve this problem using a single present value or future value table.
Please show all of your work starting with the formula in words and symbols.
c) Explain how to find the present value of a deferred annuity using a single
present value or future value table in 100 words or less.

PROBLEM 3:

Dr. Ferry wants to save for a new truck. The problem has the following
characteristics:
 Assume that Dr. Ferry will make annual payments in a savings account at the end of each year.

Cost of truck $40,000

Interest rate 10% annually
Time span 2 years

Required:

a) Calculate how much Dr. Ferry must save each year to buy the truck.
b
) Calculate the interest that Dr. Ferry earned the first year.
Calculate the interest that Dr. Ferry earned the second
c) year.
d
) Check your work if the number of years is 2.

Problem 4

Patti wants to buy a home. The home she is interested in has the following characteristics:

Price $250,000
compounded yearly
Interest rate (market rate) 3% (annually)
Term (length of loan) 30 years

Required:
a
) Calculate the payment (also called, rent) that she must pay each year.
b
) Calculate the interest for the mortgage (loan).