[icschn]

How do you figure out how much money must be set aside to pay child support of $525 per month for four years if you have an interest rate of 6% per year?

[dawgsnkats]

icschn,
525/mo for 4 years= 525 x 48 =25,200. This is your principle. Mulitply the principle by the interest rate 6%. Interest for one year is 1512. 1512 x 4 years equals 6048. Add 6048 to 25,200 and the total to set aside is 31,248. Broken down into monthly payments that would equal 651 per month to set aside. Hope this helps.

[morgaine300]

dawgsnkats, that doesn't work. First, you can't change the monthly payments. They have to be $525 as stipulated by the problem, and you wouldn't have to set aside $651 per month to get $525 per month. That's like someone taking part of your money away as you set it aside, instead of earning interest.

25,200 isn't the principal. If someone sets money aside today, it will start earning interest. So by time they make the first 525 payment, there's interest already earned on it. And by time they make the second payments, there's more interest earned, etc. 25,200 is the total amount that will pay out of the thing over the 4 years - part of it is already interest.

It's kind of like if you were making car payments - your payments include part interest. If you took those payments and mutliplied it by the total payments made, that would not be your principle.

You also can't take a principle and figure interest for one year and multiply by four. First of all, the payments are monthly and there's 48 payments, not 4. Second, you aren't accounting for coumpounding. You're trying to do it like it's simple interest.

[morgaine300]

Present value is something you have now that you will be subtracting payments off. Future value is something that you will put money into and grow into something into the future. Which one is this?

Is this a lump sum or a series of payments?

Also keep in mind that everything has to be done by periods. That is, these payments are monthly, and it will compound monthly, so you have to look at it from the point of view of 12 periods per year, and a total of 48 periods.

Please keep in mind we aren't here to do your problem for you, so see if you can take the above information and maybe post an idea of how to work the problem, and it can be checked. You also might want to say how you are supposed to be doing these - everyone has their own method, but there's actually five different ways you can be doing these: using tables, financial calculator, algebraic equations, Excel, and the long way using just plain math. For class, tables are the most common method.

[dawgsnkats]

morgaine300, I read the question as a 6% penalty per payment for child support. I supposed the 525 was payment PRIOR to adding interest. Ics can provide whether this is a real world application or a homework question. Interpretation is everything. If we are providing future values for interest to be paid, then lets venture down the path of percentages yield for investing the amount to be set aside to further decrease the amount to be procured.

[newbrat2]

1. Working Capital Management. Indicate how each of the following six different transactions that Dynamic Mattress might make would affect (I) cash and (ii) net working capital:

a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.

[newbrat2]

A new computer system allows your firm to more accurately
Monitor inventory and anticipate future inventory shortfalls. As a result, the firm feels more able
To pare down its inventory levels. What effect will the new system have on working capital and
On the cash conversion cycle?

[morgaine300]

newbrat2, can you please start your own thread with new questions. And also read the guidelines for posting homework problems:
Ask Me Help Desk - Announcements in Forum : Homework Help

[morgaine300]

morgaine300, i read the question as a 6% penalty per payment for child support. i supposed the 525 was payment PRIOR to adding interest. ics can provide whether this is a real world application or a homework question. interpretation is everything. if we are providing future values for interest to be paid, then lets venture down the path of percentages yield for investing the amount to be set aside to further decrease the amount to be procured.

Not quite sure everything you're saying there. But... it said interest, not penalty. Second, the $525 is not a payment prior to adding interest. The interest isn't on the $525. It's on the initial investment set aside which with to make the payments. You're trying to add interest to those payments. No, it's asking for what needs set aside in order to to make the payments, meaning some amount is being set aside so that the person can start pulling $525 out of that investment in order to make child support payments. In the meantime, it's earning interest. As each payment is pulled out, whatever's left over is still earning interest. The fact that it's child support is completely irrelevant. Mathematically, it only matters that an initial amount is set aside and the payments are being pulled out of it, and each of them is already affected by the interest being earned.

It's a typical homework problem.