BUSI 320 Comprehensive Problem 3
Use what you
have learned about the time value of money to analyze each of the following
decisions:
Decision #1: Which
set of Cash Flows is worth more now?
Assume that your grandmother wants to give
you generous gift. She wants you to
choose which one of the following sets of cash flows you would like to receive:
Option A: Receive a one-time gift of $9000today.
Option
B: Receive a $1300 gift each year for
the next 10 years. The first $1300 would
be
received 1 year from today.
Option C: Receive a one-time gift of $15,000 10 years
from today.
Compute
the Present Value of each of these options if you expect the interest rate to
be 3% annually for the next 10 years.
Which of these options does financial theory suggest you should choose?
Option A would be worth $__________
today.
Option B would be worth $__________
today.
Option C would be worth $__________
today.
Financial theory supports choosing Option
_______
Compute
the Present Value of each of these options if you expect the interest rate to
be6% annually for the next 10 years.
Which of these options does financial theory suggest you should choose?
Option A
would be worth $__________ today.
Option B would be worth $__________
today.
Option C would be worth $__________
today.
Financial theory supports choosing Option
_______
Compute
the Present Value of each of these options if you expect to be able to earn 9%
annually for the next 10 years. Which of
these options does financial theory suggest you should choose?
Option A
would be worth $__________ today.
Option B would be worth $__________
today.
Option C would be worth $__________
today.
Financial theory supports choosing
Option _______
Decision #2 begins at the top of
page 2!
Decision #2: Planning
for Retirement
Tom and
Tricia are 22, newly married, and ready to embark on the journey of life. They both plan to retire 45 years from
today. Because their budget seems tight right
now, theyhad been thinking that they would wait at least 10 years and then
start investing $2400 per year to prepare for retirement. Tricia
just told Tom, though, that she had heard that they would actually have more
money the day they retire if they put $2400per year away for the next 10 years
– and then simply let that money sit for the next 35 years without any
additional payments–then they would have MORE when they retired than if they
waited 10 years to start investing for retirement and then made yearly payments
for 35 years (as they originally planned to do). Please
help Tom and Tricia make an informed decision:
Assume
that all payments are made at the END a year (or month), and that the rate of
return on all yearly investments will be 7.5% annually.
(Please do NOT ROUND when entering “Rates”
for any of the questions below)
a)
How much money will Tom and Tricia have in 45
years if they donothing for the next
10 years, then put $2400 per year away for the remaining 35 years?
b)
How much money will Tom and Tricia have in 10
years if they put $2400 per year away for the next 10 years?
b2) How much will
the amount you just computed grow to if it remains invested for the remaining
35 years, but without any
additional yearly deposits being made?
c) How
much money will Tom and Triciahave in 45 years if they put $2400 per year away
for each of the next 45 years?
d) How much money will Tom and Tricia have in 45
years if they put away $200 per MONTH at the end of each
monthfor the next 45 years? (Remember
to adjust 7.5% annual rate to a Rate per month!)
e) If
Tom and Tricia wait 25 years (after the kids are raised!) before they put
anything away for retirement, how much will they have to put away at
the end ofeach yearfor 20 years in order to have $800,000 saved up on
the first day of their retirement 45 years from today?
ScholarMatic: Explanation & Answer
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