1. You are considering buying an investment that pays you $20,000 at the end of
ID: 2353310 • Letter: 1
Question
1. You are considering buying an investment that pays you $20,000 at the end of every year for 6 years. If you desire a 9% rate of return on your investment, what price would you be willing to pay for this today? (Round to the nearest whole number.)2. You are building a yacht. It will be done in 5 years. You have 3 choices regarding payment. 1) You can pay for it now and pay $1,200,000; 2) you can pay for it when it is complete and pay $1,543,000; or 3) you can pay for it with end of the year installments of $250,000 per year for 5 years. Assume an interest rate of 7%.
In order to consider the value of choice 2, what time value of money variable should you solve for in order to compare it against the other choices?
a) PMT=308,600
b) PV=1,100,138
c) PV=1,543,000
3. You are building a yacht. It will be done in 5 years. You have 3 choices regarding payment. 1) You can pay for it now and pay $1,200,000; 2) you can pay for it when it is complete and pay $1,543,000; or 3) you can pay for it with end of the year installments of $250,000 per year for 5 years. Assume an interest rate of 7%.
Based upon time value of money considerations, what is the best payment choice for you?
a) Choice 2
b) Choice 1
c) Choice 3
4. You have $2000 to put in the stock market today. Assuming you can earn an 8% return, how many years must you wait until you have accumulated $4000? (Round to the nearest whole number.)
5. You are building a yacht. It will be done in 5 years. You have 3 choices regarding payment. 1) You can pay for it now and pay $1,200,000; 2) you can pay for it when it is complete and pay $1,543,000; or 3) you can pay for it with end of the year installments of $250,000 per year for 5 years. Assume an interest rate of 7%.
In order to consider the value of choice 1, what time value of money variable should you solve for in order to compare it against the other choices?
a) FV=1,683,062
b) PV=1,200,000
c) FV=1,200,000
6. You deposit $1000 at the end of the year for 5 years in an account that is paying 5% interest. How much have you earned in INTEREST at the end of the 5 years? (Round to the nearest whole dollar.)
7. Your 6 year old daughter Martha inherits $50,000 cash from her grandparents. If you invest the money and receive a 10% return, how much will be available in 12 years when Martha starts college? (Round to the nearest whole number.)
8. You want to purchase a boat in 5 years. You will need $15,000 to buy the boat you want. How much do you have to put in your savings account today assuming you can earn 4% interest? (Round to the nearest dollar.)
9. You are building a yacht. It will be done in 5 years. You have 3 choices regarding payment. 1) You can pay for it now and pay $1,200,000; 2) you can pay for it when it is complete and pay $1,543,000; or 3) you can pay for it with end of the year installments of $250,000 per year for 5 years. Assume an interest rate of 7%.
In order to consider the value of choice 3, what time value of money variable should you solve for in order to compare it against the other choices?
a) PV=1,025,049
b) FV=1,250,000
c) PMT=1,437,685
10. You are considering an investment opportunity that would give you $20,000 per year at the end of each of the next 5 years. Assuming you desire to earn 9% interest, how much would you have to pay for the investment today? (Round to the nearest dollar.)
11. You want to purchase a boat in 5 years. You will need $15,000 to buy the boat you want. How much do you have to save each year assuming you can earn 3% interest? (Round to the nearest dollar.)
12. You give your dad $500 at the end of every year for the next 10 years to save for you. At the end of the 10 years, he gives you $8,000! What rate of interest did your dad pay you? (Round to the nearest whole number.)
Explanation / Answer
1. the formula for a an annuity immediate is 20,000((1-v^n)/i) where v = 1/(1+i) v=1/1.09 = .91743 v^6 = .59267 annuity = 89718
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