Go, Chinese Economy

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Fin 6301

Prof. Yexiao Xu

Section 001

Fall 2015
Problem Set #2
Due in class by 1:00 PM Wednesday, September 16, 2015

Show your work!
1. Mary is interested in driving a new 2015 Ford Taurus for three years. The Ford dealer quoted Mary two options— financing or leasing. The leasing deal requires a down payment of $1,999 and a monthly payment of $239 for 36 months. Alternative she can purchase Taurus at $21,999 using dealer’s promotional financing deal at 2.99% interest rate (APR on a monthly base) for 36 months. At the end of the 36 month, the car is worth 65% of the purchase price. (that is, if she leases the car, she can buy the car from the dealer at that price; if she purchases the car, she can sell the car at that price). Mary has heard that you are taking Fin6301 and would like to get your help. Assume that the interest rate is 6% (APR on a monthly base)
(a) If Mary uses the financing deal to purchase her car, how much does she pay each month?
(b) Which option is the best? (hint: comparing the PV of costs)
2. After graduating from UTD at age 25, John got his first job at Goldman Sachs with an annual salary of $60,000 a year and a one-time signing bonus of $25,000. He bought a car using his signing bonus. Goldman Sachs offers a
401K retirement investment plan that will match employee’s contribution up to 10%. For example if John invests
1% in the 401K account, Goldman Sachs will put in another 1% into his account. John is expecting an annual salary increase of 2.4% (APR on a monthly base). Suppose, the 401K investment plan will earn him an annual return of 8.4% (APR on a monthly base). (Assume the beginning of age 25 is month 0 and salary is paid at the end of each month, i.e., beginning of age 65 is the last period)
(a) What percentage of salary should John invest in his 401K account in order for him to have $2 million in the…...

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