SOLUTIONS

Prince Willy and his failing relationship

"Prince Willy has fallen on difficult times and wants to buy a 10 year commitment ring for
his partner, Jordan. He can't afford to buy it outright, so he goes to the Bank of Stewart
to investigate his options."

1. The ring is valued at $50000 and Prince Willy currently has $20000 in savings.
Calculate the amount he would need to borrow.
$50000-$20000 = $30000

2. The Bank of Stewart provides the following two loan options. Write recurrence
relations for each option to show the values of the loans, Sn, after n years, assuming he
borrows the full amount from Q1.

Loan Option A Loan Option B

Compound interest loan with an interest Compound interest loan with an interest
rate of 2% p.a., compounding annually rate of 2.5% p.a., compounding quarterly

Option A → So = principal, Sn+1 = RVn where R = (1+ r / (100 x p))

So=30000, Sn+1= 1.02Sn

Option B → So = 30000, Sn+1= 1.00625Sn

4. Use a rule to calculate how much money Prince Willy will owe the Bank of Stewart
after 10 years for each option, to the nearest cent.
Sn= R^n x So
A → S10 = 1.02^10 x 30000 = $36569.83
B → S10 = 1.00625^40 x 30000 = $38490.80

3. What is the effective interest rate of each option, rounded to 3 decimal places?
eff(r,n)
A → eff(2,1) = 2.000%
B → eff(2.5,4) = 2.524% (rounded)
5. What would your recommendation to Prince Willy be, based on the above options?

Prince Willy should choose Loan Option A, because he will owe the bank $1920.97 less
after 10 years than if he chose Loan Option B

6. Construct an amortisation table for the preferred reducing balance loan (from Q4),
assuming that Prince Willy wants to pay off the loan in full after 4 years and makes
payments of $7500 each payment period, with a different payment for the final year.

Payment Payment Interest Principal Balance

number reduction

0 0 0 0 30000

1 7700 600 7100 22900

2 7700 458 7242 15658

3 7700 313.16 7386.84 8271.16

4 8436.58 165.42 8271.16 0

7. Prince Willy is still undecided, so he considers investing his current savings instead of
taking out a loan. The Bank of Stewart offers the following compound interest
investment accounts. Write recurrence relations for each option to show the value of the
investments, Wn, after n years (to 3 decimal places).

Investment Option A Investment Option B

Compound interest investment at 6% p.a., Compound interest investment at 4% p.a.,

compounding monthly, with additions of compounding quarterly, with additions of
$120 per month $450 per quarter

Wo=principal, Wn+1=RWn + D
Option A → Wo=20000, Wn+1= 1.005Wn + 120

Option B →.Wo=20000, Wn+1= 1.010Wn + 450

8. What would the value of each of these investment options be after 1 year, to the
nearest cent?
CAS – principal (enter)
Ans x R^n
Hit enter once for each payment period to reach 1 year

A → 20000 (enter).
Ans x 1.005 + 120
Enter 12 times (1 year investment)
= $22713.82
B → 20000 (enter)
Ans x 1.01 + 450
Enter 4 times (1 year investment)
= $22639.26

9. Plot both investment options using a Wn versus n graph over 1 year

10. Which investment option would you recommend Prince Willy to choose, and why?

Prince Willy should choose Investment Option A, as his investment will be worth $74.56
more after 1 year than if he chose Investment Option B. After 2 years, his investment
would be worth $209.34 more than Option B, etc.

Prince Willy hears that Duffy Bank also offers some loan and investment options.

11a. If Prince Willy invests $20000 into a Bank of Duffy account with a compound
interest rate of 4% p.a., compounding monthly, and making additional payments of $220
per month, how many months (to the nearest month) would it take for the investment to
be worth at least $50000?
Answer = 90 months

Finance Solver
N= ?
I%= 4
PV= -20000
Pmt= -220
FV= 50000
PpY= 12

N = 89.922, therefore 90 months until the investment reaches $50000

11b. If Prince Willy was to use the investment option in Q11a, but after 50 months he
changed his payments to $200 per month, how many months in total would it take for
the investment to be worth at least $50000?
Answer = 93 months

STEP 1: Find the value of the investment after 50 months

Finance Solver
N = 50
I%= 4
PV= -20000
Pmt= -220
FV= ?
PpY= 12

FV = 35568.84057855
STEP 2: Find the number of months it takes to go from the current value (after 50
months) to reach $50000 with the new payments ($200)
Finance Solver
N=?
I%= 4
PV= -35568.84057855
Pmt= -200
FV= 50000
PpY= 12

N = 42.26

STEP 3: Find the total number of months for the investment to go from $20000 to
$50000
50 months + 42.26 months = 92.26 months
Compounds occur monthly, therefore investment will reach $50000 after 93 months
(value will only be $49904.74 after 92 months)

12. Prince Willy decides his relationship is close to ending, so he needs the commitment
ring straight away. He decides to borrow $30000 from the Bank of Duffy at a compound
interest rate of 5.5% p.a., compounding quarterly. If Prince Willy pays off the reducing
balance loan after exactly 10 years, how much interest will he have paid at the end of
the loan period (to the nearest cent)?

Answer = $9203.17

STEP 1: Find the payments per quarter

Finance Solver
N= 40 (10 years x 4 quarters)
I%= 5.5
PV= 30000
Pmt= ?
FV= 0
PpY= 4
Pmt = -980.0792374

STEP 2: Calculate the total payment required to pay off the loan across 10 years
Total payment = quarterly payment (Pmt) x number of payments (N)
 = 980.0792374 x 40
= $39203.20

STEP 3: Calculate the total interest of the loan

Interest = total payment - principal
= 39203.20 - 30000
= $9203.17

Jordan loves their new ring, but asks for a new car as a sign of Prince Willy’s true
love.They ask for a Tesla Model X, costing $60000. Since Jordan did not complete Year
Twelve General Maths, Prince Willy needs to explain how this purchase will depreciate
over time, and is therefore not a worthwhile purchase.

14. Complete the following table to show the depreciation of this car over time 5 years.
Assume that the car travels on average 12 000km per year.

Recurrence relation Value of car after 5 years

Flat rate Vo=initial value, Vn+1=Vn - D, where D= r/100 x Vo Vn=Vo-nD

depreciation (12% Vo=60000, Vn+1= Vn - 7200 V5= 60000 - 7200 x 5
p.a.) V5= $24000

Reducing-balance Vo =initial value, Vn+1=RVn, where R = 1 - (r/100) Vn=R^n x Vo

depreciation (12% Vo=60000, Vn+1= 0.88Vn V5= 0.88^5 x 60000
p.a.) V5= $31663.92

Unit-cost Vo=initial value, Vn+1=Vn - D, where D = unit cost Vn=Vo-nD

depreciation Vo=60000, Vn+1= Vn - 0.32 Vn= 60000 - 0.32n
(32 cents/km) V5= 60000 - 0.32 x (5 x 12000)
V5= $40800

15. Which method of depreciation would be best for Prince Willy to show Jordan, if he
wants to convince them not to purchase a Tesla Model X?
Flat rate depreciation, as this model shows the car losing the most value after 5 years.