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Tema [17]
3 years ago
8

Joe Levi bought a home in Arlington, Texas, for $147,000. He put down 25% and obtained a mortgage for 30 years at 8.00%. What is

the difference in interest cost if he had obtained a mortgage rate of 6.00%
Business
1 answer:
Leni [432]3 years ago
4 0

Answer:

53,367

Explanation:

The first thing we do is to substract the down payment from the initial amount, because this payment is not part of the mortgage.

147,000 x 25% = 36,750

147,000 - 36,750 = 110,250

Next, to find the financed amount we use the present value of an annuity formula:

PV = X [(1 - (1 + i)^-n) / i ]

Where:

  • PV = Present value, in this case, the initial financed amount of $110,250
  • X = Value of the annuity payments.
  • i = Interest rate
  • n = number of compounding periods

For the 8% interest rate we have:

110,250 = X [(1 - (1 + 0.08)^-30) / 0.08]

110,250 = X [11.26]

110,250 / 11.26 = X

9,791.3 = X

Now we multiply this value by 30 to obtain the total amount paid

9,791.3 * 30 = 293,739

The total interest cost under then 8% interest rate is the total amound paid minus the initial amount:

Total interest cost = 293,739 - 110,250

                              = 183,489

We do the same for the 6% interest rate:

110,250 = X [(1-(1 + 0.06)^-30) / 0.06]

110,250 = X [13.76]

110,250 / 13.76 = X

8,012.4 = X

8,012.4 * 30 = 240,372

Total interest cost = 240,372 - 110,250

                              = 130,122

Difference in interest cost = 183,489 - 130,122

                                           = 53,367

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1 year ago
An investment earns 35% the first year, earns 40% the second year, and loses 37% the third year. The total compound return over
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Answer:

19.07%

Explanation:

The computation of the total compound return over the 3 years is shown below:

= (1 + investment percentage earned in first year) × (1 +  investment percentage earned in second year)  × (1 +  investment percentage loss in second year)

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A manufacturer of printed circuit boards is considering purchasing a new surface mount technology component placement system. Tw
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Answer:

R is a better alternative because it has a higher NPV than Q.

Explanation:

Machines                            Q                                  R

First costs                   $380,000                  $395,000

Net annual revenue $150,000 in year 1,      $152,500

                                  increasing by $500

                                   per year thereafter  

Salvage value               $4,000                             0

Life, years                           8                                 10

MACRS 7 year recovery:

year                    %                         Q                           R

1                      14.29%               54,302                  56,445.50

2                    24.49%               93,062                  96,735.50    

3                     17.49%               66,462                  69,085.50

4                     12.49%               47,462                  49,335.50

5                      8.93%               33,934                   35,273.50

6                      8.92%               33,896                  35,234.00

7                      8.93%               33,934                   35,273.50

8                      4.46%                16,948                    17,617.00

net cash flow

year                                    Q                           R

1                                     116,505.70                   118,880.93

2                                    130,396.70                  132,982.43    

3                                    121,411.70                     123,304.93

4                                    115,086.70                   116,392.43

5                                    110,676.90                    111,470.73

6                                    110,930.10                    111,456.90

7                                    111,326.90                     111,470.73

8                                    108,306.80                 105,290.95

9                                                                            99,125

10                                                                           99,125

Using a financial calculator, I calculated the NPV using a 12% discount rate:

  • Q's NPV = $200,636.15
  • R's NPV = $259,221.01

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