Answer: See explanation
Explanation:
Collusion refers to the agreements among the sellers of a particular product to either fix or increase the price and also reduce output. The main idea behind this is to increase profits and also reduce the competitiveness in such market.
Collusion can bring about high prices for the consumers and this ultimately leads to the reduction in the consumer surplus. Also, the new firms that want to enter the market may discouraged since the collusion can be an entry barrier.
A water company has the monopoly in the water market and sells 7 units of output at $5.00 per unit and 8 units of output at $4.90 per unit. If the water company produces and sells the eighth unit, what must its marginal cost be
Answer:
$4.20
Explanation:
First and foremost, the marginal cost is the cost incurred in producing an extra unit of output, in this case, the marginal cost of eight-unit is the extra cost of producing one more after 7 units have been produced
Total Cost of producing 7 units=$5.00*7=$35.00
Total Cost of producing 8 units=$4.90*8=$39.20
Marginal cost of eight unit=Total Cost of producing 8 units-Total Cost of producing 7 units
Marginal cost of eight unit=$39.20-$35.00
Marginal cost of eight unit=$4.20
Fern and Grover wish to combine their professional accountancy practices into a single firm that combines the pass-through tax status and other advantages of a partnership with limits to the personal liability of the partners. The appropriate business organization for this enterprise is most likely:______.
a. a family limited liability partnership.b. a limited liability partnership.c. a limited liability company.d. a limited liability limited partnership.
Answer:
The correct option is b. a limited liability partnership.
Explanation:
Limited liability partnerships (LLPs) are a type of partnership in which each partner's liability is limited to the amount invested in the company.
Limited liability means that creditors cannot seize a partner's personal assets or income if the partnership fails.
Spreading risk, leveraging individual abilities and knowledge, and establishing a division of labor are all advantages of having business partners.
Some of the professional businesses in which LLPs are common include accounting firms, legal firms, and among others.
Therefore, the correct option is b. a limited liability partnership.
g A company shows a balance in Salaries and Wages Payable of $50,000 at the end of the month. The next payroll amounting to $75,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries
Answer and Explanation:
The journal entry is
Salaries and Wages Payable $50,000
Salaries and Wages Expense $25,000
To Cash $75,000
(Being cash paid is recorded)
Here salaries & wages payable and salaries & wages expense is debited as it decreased the liabilities & increased the expense while the cash is credited as it decreased the assets
A property was purchased by an investor. The property is expected to produce $200,000 of annual net operating income in year 1; increasing $20,000 every year thereafter. The owner intends to sell the property at the end of year 5.
Assuming the bank requires a 1.25 debt coverage service ratio based on the expected first year NOI, what is the maximum monthly mortgage payment?
Answer:
$13,333.33
Explanation:
Debt service coverage ratio = Net operating income in year 1 / Annual debt service
Annual debt service = Net operating income in year 1 / Debt service coverage ratio
Annual debt service = $200,000 / 1.25
Annual debt service = $160,000
1 years = 12 months
Monthly mortgage payment = Annual debt service / 12 months
Monthly mortgage payment = $160,000 / 12
Monthly mortgage payment = $13333.33333333333
Monthly mortgage payment = $13,333.33
So, the maximum monthly mortgage payment is $13,333.33.
A partnership is a form of corporation.
True or False?
Mildred and Robert are the only buyers in the market for DVDs. Mildred buys 5 DVDs when the price of a DVD is $6.00 , 4 DVDs when the price of a DVD is $8.00 , and 2 DVDs a month when the price of a DVD is $10.00 . Robert buys 18 DVDs a month when the price of a DVD is $6.00 , 9 DVDs when the price of a DVD is $8.00 , and zero DVDs when the price of a DVD is $10.00 . In the market for DVDs, what do we know about the quantity demanded?
Answer:
increases as the price falls
Explanation:
A. increases as the price rises
B .at $8.00 a DVD is 8 DVDs a month
C. at $6 a DVD is less than the quantity demanded at $8.00 a DVD
D. increases as the price falls
E .at $6.00 a DVD is 4 DVDs a month
According to the law of demand, the higher the price, the lower the quantity demanded and the lower the price, the higher the quantity demanded.
As price decreases, quantity demanded increases
"Standard Cost Data per 1 Unit Quantity Price Direct Material 3 lbs $2.00/lb Direct Labor 2 hrs $4.00/hr Actual Data: Units produced 20 Material purchase 100 lbs at $2.25 per lb Material usage 90 lbs Direct Labor 30 hrs; total cost $123 Compute all standard costs and variances for DM & DL. Show all computations."
Answer and Explanation:
The computation is shown below:
The Standard cost for 20 units is
Material (20 units × 3lbs × $2lb) $120
Direct labor (20 units × 2lbs × $4) $160
Total standard cost $280
Now
Direct material price variance = (Actual price -Standard price) × Actual quantity
= (2.25-2.00) × 90
=22.5 Unfavorable
Direct material quantity variance = (Actual quantity- Standard quantity) × Standard price
=(90-20x3) × 2
= $60 unfavorable
Direct material cost variance =Direct material price variance + Direct material quantity variance
=22.5 UF+$60UF
=82.50UF
Direct labor Rate variance = (Actual rate -Standard rate) × actual hours
= (4.10-4.00) × 30 hrs
= $3 Unfavorable
Actual rate = $123 ÷ 30 hrs
= $4.10
Direct labor Quantity variance = (Actual hours -Standard hours ) × Standard rate
=(30-20 × 2) × 4
=$40 favorable
Direct labor cost variance =Direct labor Rate variance+Direct labor Quantity variance
=$3 unfavorable + $40 favorable
=$37 favorable
If the wage of the fifth worker is $20 and his or her value of the marginal product of labor is $25, the firm a. benefits by stopping at this level of labor. b. is likely to fire the fifth worker. c. asks this fifth worker to work overtime. d. is likely to benefit by hiring more workers. e. is likely to lose profit by hiring more workers.
A. benefits by stopping at this level of labor. Option A is correct.
What are the benefits of division of labor?The specialisation of duties and responsibilities within a production process is known as the division of labour. It has many advantages, including improved productivity and efficiency. Workers can become more skilled and proficient in their particular role by breaking down a complex task into smaller, more focused tasks, which leads to higher-quality output and quicker production times. Because mass production can reduce costs per unit, the division of labour also makes it easier to achieve economies of scale. Additionally, it enables more latitude in task distribution and workload modification. As workers concentrate on gaining expertise in their area of specialisation, it can also result in more innovation and specialisation. In general, the division of labour has led to significant advancements in modern industrial production.
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Describe the role of separation and termination in relation to broader human resources and business objectives
Answer:
Separation and or termination in HR relates to the cessation of the relationship between employer and employee.
Separation and or termination of the contract may occur in the following ways:
1. Constructive Discharge
2. Firing
3. Layoff
4. Termination by Mutual Agreement
5. Termination with Prejudice
6. Termination without Prejudice
7. Involuntary Termination of employment contract
8. Voluntary Termination of employment contract
9. Wrongful Termination of employment contract
10. Cessation of Temporary Contracts
Explanation:
Regardless of the type of separation or termination which occurs, the business owner and the the HR manager must realize that the HR funnel must never run short of hands with which the organization will attain its goals/objectives.
Recognizing the times lines for contracts that are terminal in nature, anticipating and preparing for sudden separation and planning adequately for these occurrences using HR Planning enables the business to continue to thrive regardless of its rate of turnover.
Cheers
each cushion requires 2 pound of the foam used as stuffing. The company has a policy has a policy that the ending invetory of foam each month must be equal to 15% of the following month's expected production needs. How many pounds of foam does the porch cushioon company need to purchase in auguyst
Answer:
34,200
Explanation:
Calculation to determine How many pounds of foam does The Porch Cushion Company need to purchase in August
Does
First step is to calculate the Opening Inventory
Opening Inventory = (100%-15%)*(18,000*2)
Opening Inventory=85%*36,000
Opening Inventory=30600 pounds
Second step is to calculate the
Closing Inventory = 15%* (12,000*2)
Closing Inventory=15%*24,000
Closing Inventory=3600 pounds
Now let calculate the No of pounds required to purchase using this formula
No of pounds required to purchase = Opening inventory+Closing inventory
Let plug in the formula
No of pounds required to purchase=30,600+3,600
No of pounds required to purchase=34,200
Therefore the amount of pounds of foam that The Porch Cushion Company need to purchase in August is 34,200
Baruch co. has 8% coupon bonds on the market that have 10 years left to maturity. The bonds will make annual payments. If the YTM on these bonds is 6%, what is the current bond price
Answer:
the current bond price is $1,147.20
Explanation:
The computation of the current bond price is shown below:
Given that
NPER = 10
RATE = 6%
PMT = $1,000 × 8% = $80
FV = $1,000
Here we assume the future value be $1,000
The formula is shown below:
= -PV(RATE,NPER,PMT,PV,TYPE)
After applying the above formula, the current bond price is $1,147.20
A company purchases 20,000 pounds of materials. The materials price variance is $4,000 favorable. What is the difference between the standard and actual price paid for the materials
Answer:
The actual price was $0.2 lower than the standard price.
Explanation:
Giving the following information:
A company purchases 20,000 pounds of materials. The materials price variance is $4,000 favorable.
To calculate the direct material price difference, we need to use the following formula:
Direct material price variance= (standard price - actual price)*actual quantity
4,000 = (direct material price difference)*20,000
$0.2= direct material price difference
The actual price was $0.2 lower than the standard price.
If total assets decreased by $49,928 during a period of time and stockholders' equity increased by $26,024 during the same period, then the amount and direction (increase or decrease) of the period's change in total liabilities is a.$21,578 increase b.$49,928 decrease c.$75,952 increase d.$75,952 decrease
Answer:
d.$75,952 decrease
Explanation:
We simply use the Accounting Equation to determine the period's change in total liabilities.
So, the Accounting Equation states :
Assets = Equity + Liabilities
also
Assets - Equity = Liabilities
therefore,
($49,928) - $26,024 = Liabilities
(- $75,952) = Liabilities
conclusion
The period's change in total liabilities is $75,952 decrease
Project planning teams use project life cycle models because various types of projects have differing demands. Which of the following sequences of stages is most appropriate for a life cycle model for research and development (R & D) projects?
a. define - measure - analyze - improve - control.
b. concept definition - demonstration - development - production.
c. pre-planning - design - procurement - construction - start up.
d. concept - requirements - design - code - test - turnove.
Answer:
concept definition - demonstration - development - production
Explanation:
Research and development is mainly concerned with the development of a new concept, incorporation into a product, and delivery of product to the market as a way to improve the bottom line of the company.
It allows companies maintain a competitive edge over others in the same industry by bring new and innovative products to the customer.
The stages of R&D include: concept definition - demonstration - development - production.
The innovative idea is first defined and feasibility is evaluated.
The concept is demonstrated to show practicability of the idea.
The concept is further developed to suit customer needs.
Finally production and marketing is done to make product available to the customer.
A company has 360,000 shares authorized, 200,000 shares issued, and 100,000 shares outstanding. The balance in its Common Stock account is $200,000. The company does a 2-for-1 stock split. What is the par value of its stock after the split
Answer:
$1 par value
Explanation:
The computation of the par value of the stock after the split is given below:
= $200,000 ÷ (100,000 × 2 )
= $200,000 ÷ 200,000
= $1 par value
Hence, the par value of its stock after the split is $1 par value
We simply divide the balance by the number of outsanding shares so that the par value could come
ow do each of the following events change the demand for or supply of jeans? A. The price of a denim skirt halves . B. People’s incomes increase . C. Upper A new technology becomes available that reduces the time it takes to manufacture a pair of jeans . D. The price of the cloth (denim )used to make jeans rises . E. Jeans go out of fashion . F. The price of a pair of jeans rises . G. The wage rate paid to garment workers falls . H. More specialty shops start to sell jeans .
Answer:
1. the quantity demanded of jeans increases
the quantity supplied of jeans decreases
2. the demand for jeans increases
3. the supply of jeans increases
4. the supply of jeans reduces
5. the demand for jeans falls
6. the quantity demanded of jeans decreases
the quantity supplied of jeans increases
7. the supply of jeans increases
8, the supply of jeans increases
Explanation:
Only a change in the price of a good leads to a movement along the supply curve (demand curve) for that good. If price increases, there is a movement up along the supply curve and if prices decreases, there is a movement down along the supply curve. This is in line with the law of supply.
according to the law of supply, the higher the price, the higher the quantity supplied and the lower the price, the lower the quantity supplied.
Other factors other than changes in the price of the good leads to a shift of the supply curve. Such factors include :
A change in the number of suppliers
a change in the price of substitute goods
A change in the price of factors used in the production process
government regulation
If price increases, there is a movement down along the demand curve and if prices decreases, there is a movement up along the demand curve. This is in line with the law of demand.
According to the law of demand, the higher the price, the lower the quantity demanded and the lower the price, the higher the quantity demanded.
Other factors lead to a shift of the demand curve. they include :
change in taste of the consumerchange in consumer's income season change in the price of substitutesA. the price of denim halves. there would be a change in the quantity demanded and supplied. quantity demanded increases while quantity supplied decreases
b. An increase in income would lead to a rightward shift of the demand curve. demand would increase
c. As a result of new technology, supply would increase. supply curve would shift outward
d. As a result of the rise in price of denim, it because more expensive to make jeans. supply would fall.
e. If jeans goes out of fashion, consumers would no longer buy jeans. the demand would fall
g. if wages fall, it becomes cheaper to make jeans, thus the supply increases
Croissants Corporation and Donuts Company transfer their assets to Edibles Inc., which manages the assets and distributes the profits to Croissants and Donuts. This arrangement is a. none of the choices. b. a joint venture. c. a syndicate. d. a business trust.
Answer:
Edibles Inc.
This arrangement whereby Croissants Corporation and Donuts Company transfer their assets to Edibles Inc. is called:
d. a business trust.
Explanation:
Edibles Inc., as a trustee, carries out business transactions on behalf of Croissants Corporation and Donuts Company, who are regarded as the trust's members (or beneficiaries). It is a formal structure that safeguards an entity's assets against creditors and ensures that the business is professionally run in line with accepted practices.
Under the WTO agreement:_________
a. tariffs are permitted to be levied by developed countries against developing countries but not against each other
b. a dispute resolution mechanism allows countries to bring grievances to the WTO against countries that levy inappropriate trade discrimination measures
c. there is no dispute resolution mechanism except for trade involving environmental products
d. countries are allowed to place trade barriers on member countries with no particular justification, because like GATT the WTO has no enforcement mechanism
Answer:
Under the WTO agreement:_________
b. a dispute resolution mechanism allows countries to bring grievances to the WTO against countries that levy inappropriate trade discrimination measures.
Explanation:
The WTO (World Trade Organization) Agreement is an international legal framework covering about 63 agreements affecting trade in goods, services, intellectual property, standards, investment, and other issues with some impacts on world trade. The legal framework is a system of rules that supports open, fair, and undistorted trade competition, allowing tariffs and some protections.
The following is the adjusted trial balance for Stockton Company. Stockton Company Adjusted Trial Balance December 31 Cash 5,649 Accounts Receivable 2,468 Prepaid Expenses 660 Equipment 14,231 Accumulated Depreciation 2,782 Accounts Payable 1,745 Notes Payable 4,564 Common Stock 1,000 Retained Earnings 8,538 Dividends 783 Fees Earned 8,977 Wages Expense 2,286 Rent Expense 765 Utilities Expense 426 Depreciation Expense 267 Miscellaneous Expense 71 Totals 27,606 27,606 Determine the net income (loss) for the period. a.Net income $4,379 b.Net loss $4,379 c.Net loss $5,162 d.Net income $5,162
Answer:
Stockton Company
The net income (loss) for the period is:
= d. Net income $5,162
Explanation:
Stockton Company Adjusted Trial Balance December 31
Cash 5,649
Accounts Receivable 2,468
Prepaid Expenses 660
Equipment 14,231
Accumulated Depreciation 2,782
Accounts Payable 1,745
Notes Payable 4,564
Common Stock 1,000
Retained Earnings 8,538
Dividends 783
Fees Earned 8,977
Wages Expense 2,286
Rent Expense 765
Utilities Expense 426
Depreciation Expense 267
Miscellaneous Expense 71
Totals 27,606 27,606
Income Statement
For the year ended December 31
Fees Earned 8,977
Wages Expense 2,286
Rent Expense 765
Utilities Expense 426
Depreciation Expense 267
Miscellaneous Expense 71 3,815
Net income 5,162
Ed is taking off from work for four hours this afternoon and going to a baseball game. The ticket to the game costs $25 and it costs $15 to park at the stadium. Ed earns $15 an hour at his job. Ed's opportunity cost of going to the ball game is: Please choose the correct answer from the following choices, and then select the submit answer button. Answer choices $25. $100. $60. $50.
Answer: $100
Explanation:
Opportunity cost is the benefit that we forgo when another option is chosen thereby leaving out something else. Based on the information given, Ed's opportunity cost of going to the ball will be calculated as the addition of the income that's lost when he takes some time off from his work and the expenses that he incurs on the base ball game. This will be:
= ( 4 × $15) + $25 + $15
= $60 + $40
= $100
The opportunity cost is $100.
Listed here are a number of financial statement captions. Indicate in the spaces to the right of each caption the category of each item and the financial statement(s) on which the item can usually be found. Use the following abbreviations:
Category Financial Statement
Asset A Balance sheet BS
Liability L Income statement IS
Stockholders' equity SE
Revenue R
Expense E
Gain G
Loss LS
Contra asset CA
Caption Category Financial Statement(s)
Accumulated depreciation
Long-term debt
Equipment
Loss on sale of short-term investments
Net income
Merchandise inventory
Other accrued liabilities
Dividends paid
Cost of goods sold
Additional paid-in capital
Interest income
Selling expenses
Financial statements:
There are four financial statements companies produce:
Income Statement
Balance Sheet
Shareholder's Equity
Statement of Cash Flows
Answer:
Caption Category Financial Statement
Accumulated depreciation Asset Balance sheet
Long-term debt Liability Balance sheet
Equipment Asset Balance sheet
Loss on sale Loss Income Statement
of short-term investments
Net income Revenue Income Statement
Merchandise inventory Asset Balance sheet
Other accrued liabilities Liability Balance sheet
Dividends paid Equity Balance sheet
Cost of goods sold Expense Income statement
Additional paid-in capital Equity Balance sheet
Interest income Revenue Income statement
Selling expenses Expense Income statement
You have a $40,000 portfolio consisting of Intel, GE, and Con Edison. You put $23,200 in Intel, $8,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta
Answer:
1.13
Explanation:
Calculation to determine What is your portfolio beta
Portfolio beta=(23200/40000)(1.3)+(8000/40000)(1)+[(40,000-23200+8000)/40000)*(0.8)]
Portfolio beta=(23200/40000)(1.3)+(8000/40000)(1)+(8800/40000)*(0.8)
Portfolio beta=0.754+0.2+0.176
Portfolio beta= 1.13
Therefore your portfolio beta is 1.13
XYZ Corp. has filled 100,000 purchase orders during its existence. 1,100 of the purchase orders have had errors. Using an empirical probability, the probability of the next purchase order having an error is
Answer:
1.1%
Explanation:
Calculation to determine what the probability of the next purchase order having an error is using
an empirical probability
Using this formula
Probability=Purchase orders errors/Purchase orders filled
Let plug in the formula
Probability=1100/100000
Probability=0.011*100
Probability=1.1%
Therefore using an empirical probability the probability of the next purchase order having an error is 1.1%
For 115 consecutive days, a process engineer has measured the temperature of champagne bottles as they are made ready for serving. Each day, she took a sample of 10 bottles. The average across all 1,150 bottles (115 days, 10 bottles per day) was 40 degrees Fahrenheit. The standard deviation across all bottles was 0.5 degree Fahrenheit.
Required:
When constructing an X-bar chart, what would be the center line?
Answer:
40° Fahrenheit
Explanation:
For an X-bar, the centre line is then average across all components. In this case, the average temperature across all 1150 bottles over 115 days will be 40° Fahrenheit as it is reported.
Charles Company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of recorded assets and liabilities was $1,500,000 and $250,000, respectively. If Jackson meets specified sales targets, Charles is required to pay an additional $200,000 in cash per the acquisition agreement. Charles estimates the probability of this to be 50%. The direct costs related to the acquisition were $50,000. What was the amount of the goodwill related to the acquisition?
Answer:
$950,000
Explanation:
Goodwill is defined as the excess of Purchase Price over the Net Assets taken over.
therefore
Goodwill = Purchase Price - Fair Value of Net Assets taken over
Note : Acquisition cost is an expense and not included in this calculation.
Since the probability is more likely than not (Probability > or = 50 %) , we include the $200,000 in the Purchase Price
thus,
Goodwill = $2,200,000 - ($1,500,000 - $250,000)
= $950,000
Supply chain management:is based on the concept of just-in-timefocuses on removing scheduling bottlenecks within the companyfocuses on the internal routing of products from raw materials to finished goodsis a complex computerized system for managing resources efficientlyis accurately described by none of the above
Answer:
is based on the concept of just-in-time.
Explanation:
Supply chain management can be defined as the effective and efficient management of the flow of goods and services as well as all of the production processes involved in the transformation of raw materials into finished products that meet the insatiable want and need of the consumers.
Generally, the supply chain management involves all the activities associated with planning, execution and supply of finished goods and services from the manufacturers to the consumers.
Additionally, all businesses tend to use supply chain management to eliminate waste and maximize value for growth and development.
Hence, supply chain management is based on the concept of just-in-time (JIT) because it is a management framework that is focused on cutting manufacturing costs while increasing efficiency between suppliers and consumers through the use of a proper inventory system.
Concentration ratios measure the Group of answer choices geographic location of the largest corporations in each industry. degree to which product price exceeds marginal cost in various industries. percentage of total industry sales accounted for by the largest firms in the industry. number of firms in an industry.
Answer:
percentage of total industry sales accounted for by the largest firms in the industry.
Explanation:
The concentration ratio calculated the market share percentage for an industry and the same is held by the larger firms inside the industry. Also it determined the total output that could be generated from the number of firms in the industry
Therefore as per the given options, the above options should be considered correct
Use the following information to answer this question.
Bayside, Inc. 2010 Income Statement ($ in thousands)
Net sales $ 6,020
Less: Cost of goods sold 4,240
Less: Depreciation 325
Earnings before interest and taxes $ 1,455
Less: Interest paid 29
Taxable Income $ 1,426
Less: Taxes 499
Net income $ 927
Bayside, Inc. 2009 and 2010 Balance Sheets ($ in thousands)
2009 2010 2009 2010
Cash $ 80 $ 185 Accounts payable $ 1,445 $ 1,745
Accounts rec 940 780 Long-term debt 760 550
Inventory 1,560 2,010 Common stock $ 3,125 $ 3,020
Total $ 2,580 $ 2,975 Retained earnings 820 1,070
Net fixed assets3,570 3,410 Total assets $ 6,150 $ 6,385
Total liab. & equity$ 6,150 $ 6,385
What is the equity multiplier for 2010?
a) 0.52
b) 2.11
c) 2.04
d) 1.04
e) 1.56
Answer:
The correct option is e) 1.56.
Explanation:
Note: The data in this question are merged together. The complete question with the sorted data is therefore provided before asnwering the question. See the attached pdf file for the complete question with the sorted data.
The explanation of the answer is now provided as follows:
The equity multiplier can be described as a financial leverage ratio gives a measure of the total assets of a company that is financed by the shareholders of the company. This can be calculated using the following formula:
Equity multiplier = Total assets / Total Shareholder's Fund ........... (1)
Where, for Bayside, Inc. in 2010, we have:
Total assets = $6,385
Total Shareholder's Fund = Common stock + Retained earnings = $3,020 + $1,070.00 = $4,090
Substituting the figures into equation (1), we have:
Equity multiplier = $6,385 / $4,090 = 1.56
Therefore, the equity multiplier for 2010 is 1.56 and the correct option is e) 1.56.
Operations Management:is a network of manufacturing and service options.is an essential function for primarily for-profit organizations.is narrowly dedicated to a single corporate function.focuses on decisions about the production and delivery of a firm s products and services.prioritizes sustainability over profits.
Answer:
focuses on decisions about the production and delivery of a firm's products and services.
Explanation:
Operations management can be regarded as a field of business which involves administration of business practices that carried out maximization of efficiency in a firm or an organization. It entails process such as planning, organizing, as well as taking responsibility for processes in organization in order to balance revenues as well as costs. It should be noted that Operations Management focuses on decisions about the production and delivery of a firm's products and services.
. Kathy plans to move to Maryland and take a job at McCormick as the Assistant Director of HR. She and her husband Stan plan to buy a house in Garrison, MD and their budget is $500,000. They have $100,000 for the down payment and McCormick will pay for closing costs. They are considering either a 30 year mortgage at 4.5% annual rate or a 15 year mortgage at 4%. Calculate the monthly payment for each. Property taxes and insurance will add $1,000 per month to which ever mortgage they choose. What should Kathy and Stan do
Answer:
a. For a 30-year mortgage at 4.5% annual rate, we have:
Monthly required fixed loan payment = $2,026.74
Total monthly payment = $3,026.74
Total payments for 360 months = $1,089,626.85
b. For a 15 year mortgage at 4% annual rate, we have:
Monthly required fixed loan payment = $2,958.75
Total monthly payment = $3,958.75
Total payments for 180 months = $712,575.31
c. Kathy and Stan should choose a 15 year mortgage at 4% annual.
Explanation:
a. For a 30-year mortgage at 4.5% annual rate
The monthly required fixed loan payment can be calculated using the formula for calculating loan amortization as follows:
P = (A * (r * (1 + r)^n)) / (((1+r)^n) - 1) .................................... (1)
Where:
P = Monthly required fixed loan payment = ?
A = Loan amount = House budget – Down payment = $500,000 - $100,000 = $400,000
r = monthly interest rate = 4.5% / 12 = 0.045 / 12 = 0.00375
n = number of months = 30 * 12 = 360
Substituting all the figures into equation (1), we have:
P = ($400,000 * (0.00375 * (1 + 0.00375)^360)) / (((1 + 0.00375)^360) - 1) = $2,026.74
Therefore, we have:
Monthly required fixed loan payment = $2,026.74
Total monthly payment = Monthly required fixed loan payment + Property taxes and insurance = $2,026.74 + $1,000 = $3,026.74
Total payments for 360 months = Total monthly payment * 360 = $3,026.74 * 360 = $1,089,626.85
b. For a 15 year mortgage at 4% annual rate
The monthly required fixed loan payment can be calculated using the formula for calculating loan amortization as follows:
P = (A * (r * (1 + r)^n)) / (((1+r)^n) - 1) .................................... (1)
Where:
P = Monthly required fixed loan payment = ?
A = Loan amount = House budget – Down payment = $500,000 - $100,000 = $400,000
r = monthly interest rate = 4% / 12 = 0.04 / 12 = 0.00333333333333333
n = number of months = 15 * 12 = 180
Substituting all the figures into equation (1), we have:
P = ($400,000 * (0.00333333333333333 * (1 + 0.00333333333333333)^180)) / (((1 + 0.00333333333333333)^180) - 1) = $2,958.75
Therefore, we have:
Monthly required fixed loan payment = $2,958.75
Total monthly payment = Monthly required fixed loan payment + Property taxes and insurance = $ 2,958.75 + $1,000 = $3,958.75
Total payments for 180 months = Total monthly payment * 360 = $3,958.75 * 180 = $712,575.31
c. Recommendation
Since the total payment of $712,575.31 for a 15 year mortgage at 4% annual is lower than the total payments of $1,089,626.85 for a 30-year mortgage at 4.5% annual rate, Kathy and Stan should choose a 15 year mortgage at 4% annual.