A new health club has just opened up in your town. Struggling to bring in money

Question

A new health club has just opened up in your town. Struggling to bring in money now, the club is offering 10-year memberships for a one-time payment now of $800. You cannot be sure that you will still be in town for the next 10 years, but you expect that you will be. You anticipate that your benefit of belonging to the club will be $10 per month (think of this as an annual benefit of $120). Decide whether you should join at each of the following interest rates:

a. 2% b. 4% c. 6% d. 8%

You have just purchased a new home. No money was required as a down payment; you will be making payments of $2,000 per month (think of these as annual payments of $24,000) for the next 30 years. Determine the present value of your future payments at each of the following interest rates:

a. 2% b. 4% c. 6% d. 8%

You own several barrels of wine; over the years, the value of this wine has risen at an average rate of 10% per year. It is expected to continue to rise in value, but at a slower and slower rate. Assuming your goal is to maximize your revenue from the wine, at what point will you sell it?

You have been given a coin collection. You have no personal interest in coins; your only interest is to make money from it. You estimate that the current value of the collection is $10,000. You are told the coins are likely to rise in value over time by 5% per year. What should you do with the collection? On what factors does your answer depend?

The Case in Point on the increasing scarcity of oil suggested that the Khurais complex is expected to add 1.2 million barrels to world oil production by 2009. Suppose that world production that year what otherwise be 87 million barrels per day. Assume that the price elasticity of demand for oil is ?0.5. By how much would you expect the addition of oil from the Khurais complex to reduce the world oil price?

Explanation / Answer

(Question 1)

We compute Present Worth of the offer for each interest rate as follows.

(A) Interest rate = 2%

Present Worth ($) = - 800 + 120 x P/A(2%, 10) = - 800 + 120 x 8.9826** = - 800 + 1,078 = 278

Since Present Worth > 0, I would join.

(B) Interest rate = 4%

Present Worth ($) = - 800 + 120 x P/A(4%, 10) = - 800 + 120 x 8.1109** = - 800 + 973 = 173

Since Present Worth > 0, I would join.

(C) Interest rate = 6%

Present Worth ($) = - 800 + 120 x P/A(6%, 10) = - 800 + 120 x 7.3601** = - 800 + 883 = 83

Since Present Worth > 0, I would join.

(D) Interest rate = 8%

Present Worth ($) = - 800 + 120 x P/A(8%, 10) = - 800 + 120 x 6.7101** = - 800 + 805 = 5

Since Present Worth > 0, I would join.

**From P/A Factor table

NOTE: As per Chegg Answering Policy, first question has been answered.

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