Homework Assignment 2
Answer the following questions. Please show your work.
25 points possible
1. You really want to backpack through Europe. The trip will cost you $14,000. You
can go this summer and put the trip on a credit card that you will pay off monthly that has
an interest rate of 22%. It will take you 5 years to pay that off. Your other option is to
save up for the purchase and go in 4 years, saving up each month and putting the money
into an account that earns 4%. Figure out what your monthly payments will be for each
option [4 points], and then figure out the total acquisition costs of each option [1 point].
2. A -If the price of attending Big Benefits University is $42,000 a year, including
tuition, fees, books, and foregone earnings, what is the marginal cost of attending, if it
takes you 5 years to graduate? [2 points]
B - If the average college graduate makes $38,000 more every year than the average
high school graduate, what is the cumulative marginal benefit of a college education if
the average college graduate works for 40 years? [2 points]
C -Under the Cost-Benefit Analysis of this hypothetical situation, is it worth it to
attend Big Benefits University? Why or why not? [1 point - you must explain your
answer to earn this point]
3. A – Congratulations! Your first baby was born yesterday and is healthy and strong.
To guard against your premature death, you want to purchase a life insurance policy that
will replace $58,000 of your annual income until your child is 20 years old. How much
life insurance should you purchase? [2 points]
B – If you purchase a term policy that costs $40 a month, what is the total cost,
discounted for inflation, of the life insurance over a 20 year term? [2 points]
C – In a CBA, is it worth it to purchase this policy? Why or why not? Explain your
rationale to get full credit. [1 point]
4. A – Calculate the monthly mortgage payment with the following conditions: $250,000
borrowed, 6.0% interest, 30 year term. [worth 2 points]
B – If you make an additional principal payment of $5,000 in month one, how much
interest will you save in month two? [worth 3 points]
5. Make up and solve your own math problem, using any formula or mathematical
concept learned this semester. 3 points will be given for effort, and 2 points for solving
your own problem correctly. Have fun!