UGBA 103
Week 2 Assignment
Deadline : Sept 5, 11:59pm
Matteo MION / Student ID 3039805083
1)
The loan is $1,000 per year for 10 years, at 5% interest rate starting from May 20, 2026.
PVLoan 2026 = 7,721.74
(Calculated with calculator : N = 10 R = 5 PMT = 1,000 FV = 0 CPT PV)
PVLoan 2026 7,721.74
PVLoan 2025 = = = 7,354.04
(1 + r)n (1 + 0.05)1
The PV of the loan as of 2025 is $7,354.03
Option A : pay $7,500 in a single payment on May 20, 2025
—> payment happens before the loan repayment starts (May 20,2026), no need to
calculate PV
Total payment = $7,500
Option B : pay $10,000 in a single payment on May 20, 2030, with no payments in between.
—> payment 5 years after graduation (May 20, 2025), so you need to discount it back
to the PV in 2025 to compare it with the original loan and Option A.
FV 10,000
PV = = = 7,835.26
(1 + r)n (1 + 0.05)5
PV of the $10,000 payments in 2030 = $7,835.26
Conclusion
PVLoan 2025 = 7,354.04 < Option A : $7,500 < PV Option B : $7,835.26
I would not choose any option because it ends up being less expensive according to the PV to
pay the initial loan than $7,500 in 2025 or waiting to pay $10,000 in 2030, even though no
payments are made between now and then in Option B.
2)
Option 1 : $250,000 at 40 years old.
Option 2 : $350,000 at 50 years old.
I am 22 in 2025, which means I’ll turn 40 in 18 years (by 2043) and 50 in 28 years (by 2053).
To know which option is most valuable, I need to discount option 2 back to the time of option 1,
which is 10 years earlier at 40 years old (from 2053 to 2043).
a. - Interest rate 3%
FV 350,000
PVOption 2 = = = 260,432.87
(1 + r)n (1 + 0.03)10
Option 2 > Option 1
$260,432.68 > $250,000
Since $260,423.68 is greater than the $250,000 I would get at age 40, I choose Option 2.
b. - Interest rate 4%
FV 350,000
PVOption 2 = = = 236,468.04
(1 + r) n (1 + 0.04)10
Option 2 < Option 1
$236,468.04 < $250,000
Since $236,468.04 is less than the $250,000 you'd receive at age 40, I choose Option 1.
c. - Interest rate 6%
FV 350,000
PVOption 2 = = = 195,521.38
(1 + r)n (1 + 0.06)10
Option 2 < Option 1
$195,521.38 < $250,000
Since $195,521.38 is less than the $250,000 you'd receive at age 40, I choose Option 1.
d. - Employer Funding with 5% Interest rate
Option 1 : $250,000 at 40 years old
—> 40 years old is 18 years away since I am currently 22
FV 250,000
PV = = = 103,880.16
(1 + r) n (1 + 0.05)18
My employer should fund $103,880.16 at 5% interest rate to cover my $250,000 payment at 40
years old in 18 years.
Option 2 : $350,000 at 50 years old
—> 50 years old is 28 years away since I am currently 22
FV 350,000
PV = = = 89,282.77
(1 + r)n (1 + 0.05)28
My employer should fund $89,282.77 at 5% interest rate to cover my $350,000 payment at 50
years old in 28 years.
3)
Total tuition : $45,000 for 5 years, totalling $225,000
Total tuition with 10% discount if paid upfront : $202,500 (225,000 x (1-10%))
a. - Interest rate 4% for the next 5 years
Let’s discount the no-discount tuition to compare it with the 10% discounted tuition.
PVno−discount tuition = 200,332.01
(Calculated with calculator : N = 5 R = 4 PMT = 45,000 FV = 0 CPT PV)
PVno−discount tuition < PV10% discount tuition
$200,332.01 < $202,500
I am not going to take advantage of the discount in a 4% interest rate environment.
The annual $45,000 tuition for 5 years is better because PV is lower.
b. - Interest rate 1% for the next 5 years
Let’s discount the no-discount tuition to compare it with the 10% discounted tuition.
PVno−discount tuition = 218,404.41
(Calculated with calculator : N = 5 R = 1 PMT = 45,000 FV = 0 CPT PV)
PVno−discount tuition > PV10% discount tuition
$218,404.41 > $202,500
I am going to take advantage of the discount in a 1% interest rate environment.
Paying upfront is better because the discounted amount is lower than the PV of the $45,000
tuition for 5 years.
c. - Which market rate makes me indi erent ?
I need to nd at which rate the PV of the no-discount tuition equals the discounting upfront
payment of $202,500.
R = 3.62%
(Calculated with calculator : N = 5 PV = -202,500 PMT = 45,000 FV = 0 CPT R)
The interest rate where I am indi erent is approximately 3.62%.
d. - Prepayment of $80,000 when I was born
In order to determine if my parents made the right decision, I need to calculate the FV of $80,000
invested at 5% for 18 years and compare it with the discounted tuition of $202,500.
F V = PV × (1 + r)n = 80,000 × (1 + 0.05)18 = 192,529.54
The FV of $80,000 after 18 years at a 5% return is $192,529.54
$192,529.54 < $202,500
My parents should have paid at birth because the FV of the $80,000 invested at 5% for 18
years is less than the discounted tuition amount. They would have saved approximately $10,000.
4)
a.
Let’s calculate the PV of paying $10,000 at the beginning of each of the next 5 years, called an
annuity due.
PVAnnuit y due = 43,121.27
(Calculated with calculator with payments set at the beginning of the year : N = 5 R = 8 PMT =
10,000 FV = 0 CPT PV)
The present value of paying $10,000 annually at the beginning of each of the next 5 years with 8%
interest rate is $43,121.27.
PVAnnuit y due < One time payment
$43,121.27 < $50,000
My GSI should not take the o er of paying $50,000 in a single payment as it is more
expensive than paying the $10,000 dues annually.
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b.
Let’s calculate the PV of paying $12,500 at the end of each year for 5 years instead of paying and
compare it with paying $10,000 at the beginning of each year for 5 years.
PVOrdinar y Annuit y = 49,908.88
(Calculated with calculator with payments set at the end of the year : N = 5 R = 8 PMT = 12,500
FV = 0 CPT PV)
The present value of paying $12,500 annually at the end of each of the next 5 years with 8%
interest rate is $49,908.88
PVAnnuit y due < PVOrdinar y Annuit y
$43,121.27 < $49,908.88
My GSI should not take the o er of paying $12,500 at the end of each of the 5 years as the
its PV is higher than the original $10,000 annually for 5 years plan.
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