1. You are considering an investment opportunity that would give you $20,000 per
ID: 2373774 • Letter: 1
Question
1. 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.)
2. 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.)
3. 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.)
4. 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?
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 3, what time value of money variable should you solve for in order to compare it against the other choices?
9. 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.)
10. 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.)
11.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.)
12. 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.)
Explanation / Answer
1. PV($20,000,9%,5years) = $77,793
2.PV($20,000,9%,6years) = $89,718
3. FV($1000,5%,5years) - $5000 = $526
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