### Exploring Present Value

4. The April 1972 issue of Consumer Reports suggested that a homebuyer purchase a washing machine, dishwasher, and clothes dryer from a department store that charged \$675 plus 15% interest each year for two years rather than having the builder install them. The builder in this example could get the appliances for \$450, but he would add this amount on to the mortgage. If the mortgage matured in 27 years (the national average in 1972) and if the mortgage rate of interest was 7.75%, the appliances would cost a total of \$1075. The total cost of the appliances purchased at the department store on a two-year contract would be \$785. Explain why the advice of Consumer Reports is bad advice in this case.

5. Suppose you want to retire in 45 years with \$1,000,000 and the interest rate is 5%. Use the present value calulator at:
http://www.moneychimp.com/calculator/present_value_calculator.htm
to determine how much money you would need right now in order to achieve this goal. Then use this calculator to see how much you would need right now if the interest rate is 9% (which is about the historical return on funds invested in a diversified portfolio of stocks.)