1. The $55,000.00 was derived from the $30,000.

00 that baker had invested in a

money market mutual fund and the $25,000.00 that he would likely save by
getting a new mortgage. The rate is calculated in a compounding basis so as to
determine the future value of a cash flow. The formula used is FVn=PV (1+i) n

PV = $55,000.00 FV20=55,000.00(1+.06)20
i = 6% FV20 = $176,392.00
n = 20 years
2. Using the derived formula of PV, the monthly amortization is as follow:

Substituting the formula:

PMT = $75,000.00 x ( 0.09 / (1-(1+.09)-30 ))

PMT= $7,300.23

3. Table shows the loan amortization balance for years 19 and 20.

4. The computation of $55,000.00 to an investment yielding 6% for 20 years was

correct, However, Studebaker has zero debt at the end of year 20, but if he
acquired the new mortgage loan that Morton’s proposed, by the end of year 20 he
still has $46,850.35 mortgage payable. Pls. see table in answer number 3 above.
5. A. Using the Future Value formula of FVn=PV (1+i) n, the accumulated amount
after 20 years will be:
PV = $30,000.00 FV20 = $30,000.00(1+.08)20
i = 8% FV20 = $139,828.71
n = 20 years

B. Supposing a placement of $3,052.00 in a long-term investment paying 8

percent a year, the accumulated amount will now be:

FVAn = PMT∑(1+i)n-t
FVA20 = 3,052 ∑ (1+0.08) 20 – 1
FVA20 = $126,494.00

6. A. Using the Future Value formula of FVn=PV (1+i) n with 7 percent return, the
accumulated amount after 20 years is:
PV = $30,000.00 FV20= $30,000.00(1+.07)20
i = 7% FV20 = $116,090.53
n = 20 years

B. Using the long-term investment amount of $3,052.00, the accumulated

amount will now be:
FVAn = PMT∑(1+i)n-t
FVA20 = 3,052 ∑ (1+0.07) 20 – 1
FVA20 = $114,080.60

7. Exhibit 3 suggest that Studebaker has an accumulative increase on investment of

$60,352.00 ($176,392.00 less $55,000.00 less $61,040.00) which already includes
the additional $25,000.00 from the new mortgage. On the other hand, based from
the computation on question 5 and 6, the excess on money market of $30,000.00
alone gives Studebaker better return of $109,828.71 or $86,090.53, on 8% and
7% investment, respectively.

8. A. If the $30,000.00 shall be invested at 8% in 20 years, the investment would

grow up to $139,828.71. Therefore, he only need additional $260,171.29 to reach
his goal of $400,000.00. Derivation using the Future value factor in 20 years at 8%
interest, he will need to invest $5,685.32 at the end of each year.

B. Same with letter A above, the additional $260,171.29, could be raised by

saving $8,444.48 at the end of every year for 12 years. At the end of 12th year, he
already had $140,562.45 that he could invest to an 8 years, 8% investment that
would yield to a total of $260,171.29 at the end of year 8.

9. No, since payment would be made monthly, portion of the installment payment will
be apply for repayment of principal and the basis of interest decreases overtime.
Thus, as the interest decreases, portion of repayment of principal increases.

10. The annual cost of insurance amounting to $3,052.00 was added to $2,100.00 of
lost interest to get the $5,152.00. The $18,632.00 were computed using the future
value formula but payment were made at the end of the period. Thus, instead of
using future value factor of 20 years, use the FV factor of 19 years.