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Homework answers / question archive / (a) While vacationing in Langkawi, Martin Low saw the vacation home of his dreams

(a) While vacationing in Langkawi, Martin Low saw the vacation home of his dreams. It was listed with a sale price of $200,000. The only catch is that Martin is 40 years old and plans to continue working until he is 65. Still, he believes that prices generally increase at the overall rate of inflation. Martin believes that he can earn 9% annually after taxes on his investments. He is willing to invest a fixed amount at the end of each of the next 25 years to fund the cash purchase of such a house (one that can be purchased today for $200,000) when he retires.

Required: (i) Inflation is expected to average 5% per year for the next 25 years. What will Martin's dream house cost when he retires?

(ii) How much must Martin invest at the end of each of the next 25 years to have the cash purchase price of the house when he retires?

(iii) If Martin invests at the beginning instead of at the end of each of the next 25 years, how much must he invest each year?

(b) Susan Morse just closed a $10,000 business loan that is to be repaid in three equal, annual, end-of-year payments. The interest rate on the loan is 13%. As part of her firm's detailed financial planning, Susan wishes to determine the annual interest deduction attributable to the loan. (Because it is a business loan, the interest portion of each loan payment is tax-deductible to the business.)

Required:

(i) Determine the firm's annual loan payment.

(ii) Prepare an amortization schedule for the loan.

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