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(b) You are planning to go to graduate school in a program of study that will take three years
(b) You are planning to go to graduate school in a program of study that will take three years. You want to have $15,000 available each year for various school and living expenses. If you can earn 4% on your money, how much must be deposited at the start of your studies to be able to withdraw $15,000 a year for three years? (3 marks) (c) A few years ago, Michael purchased a home for $200,000. Today, the home is worth $300,000. His remaining mortgage balance is $100,000. Assuming Michael can borrow up to 80 percent of the market value of his home, what is the maximum amount he can borrow? (4 marks)
Expert Solution
Answer : b) Calculation of the amount that must be deposited at the start of your studies to be able to withdraw $15,000 a year for 3 years :
Using Excel Function of PV
=PV(rate,nper,pmt,fv)
where
rate is the rate of interst i.e 4%
nper is the number of years i.e 3
pmt is the periodic withdrwal i.e 15000
fv is the future value i.e 0
=PV(4%,3,-15000,0)
$41626.37
Alternatively,
It can be calculated as
= 15000 * PVAF @ 4% for 3 years
= 15000 * 2.77509103318 or 15000 * 2.775
= 41626.37 or 41625
Answer : c) Calculation of Maximum Amount he can borrow
Maximum Loan Amount = Market Value * 80%
= 300000 * 80%
= 240,000
Maximum Amount he can borrow = Maximum Loan Amount - Current Mortgage Balance
= 240,000 - 100,000
= 140,000
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