9. Time value of money You want to set some money aside from your trust fund tod

Question

9. Time value of money You want to set some money aside from your trust fund today to pay for a trip to the moon in five years. The trip will cost $5,000,000 in five years and the interest you can earn fromthe money set aside is 3% every year. How much money should you set aside today? a. (lmagine if you must) you are not a trust fund baby. You are a hard-working young person who finally saved your first $100,000 after not eating nor drinking for 3 years. If you invest $100,000 in an investment account today, assuming 5% annual return, how much can you expect your investment to be worth in 30 years? b. You win a lottery which will give you $20,000 ashe end of every year for the next 25 years. Alternatively, you can choose to receive a lump sum prize today. Assuming the market interest rate is 4% and there is no risk of receiving future payments involved, what must the lump sum prize be if you are indifferent between choosing the two prize options? c. ch is deciding between two projects. Both Your work for an entertainment company projects require the same amount of investment today. Project 1 is producing a p tv series which will provide a steady stream of cash inflow of $500,000 for the next 7 years at year-ends. Project 2 is developing a brand new movie generate one and only one cash inflow of $4,000,000 at the end of year 6. The com cost of capital is 8% annually. Which project should your company choose? d. whi romising from scratch which will

Explanation / Answer

Ana-a - Present value= FVn

_____________

(1+i)n   

PV= $500,000*(1/1.03)5

$500,000* 0.8626= $431,300

Ans-b FV=PV*(1+i)n

$100,000*(1+0.05)30

$100,000*4.3219=$432,190

Ans-c FV=$20,000*25 years= $500,000

PV=FVn/(1+i)n

$500,000*(1/1.04)25

$500,000*.3751=$187,550

Ans-d Project 1 FV annuity factor =(1+r)n-1)/r

(1.08)7-1)/.08

(.7138)/.08

=8.9225

Multiplying this amount by the annuity amount of $500,000, we have the future value at time period 7 .

FV=($500,000)*(8.9225)=$4,461,250

Project 2

$400,000*1.5869=$634,760

Project 1 should be choose.

  

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