David and Hana Plan to Purchase a House in 5

question 205

Multiple Choice

David and Hana plan to purchase a house in 5 years' time. David already has $20,000 that he invested in an account two years ago that is earning 0.308% interest compounded monthly. Hanna plans to contribute $675 per month for the next 5 years into her account. Determine what the nominal rate of interest (based on monthly compounding) that Hanna's investment should earn if their combined savings is to total $70,000.

• A) 3.07%
• B) 4.22%
• C) 3.68%
• D) 4.04%
• E) 4.59%

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Definitions:

Capital Investment

Funds spent by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment, calculated by subtracting the initial investment from the present value of cash inflows over a period of time.

Rate of Return

The percentage of profit or loss on an investment over a specified period.

Required Rate

Often used in reference to the minimum acceptable return on investment or the minimum discount rate used in net present value calculations.