1. You receive a gift of $2,000 at the birth of your daughter. You decide to inv
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Question
1. You receive a gift of $2,000 at the birth of your daughter. You decide to invest the money for her college education. If you can earn 8% on the money for the 18 years, how much will your daughter have if you do not use any of the interest and you do not add to the principal? Present Value of a Sum
2. On Christmas, you open a gift from Grandma and find a $50 U.S. savings bond. When you read the fine print, you realize that the bond is not worth $50 until it matures in 7 years. In the meantime, you would like to know what grandma paid for your gift. If you assume an interest rate of 6%, how much did Grandma pay for the bond? Future Value of an Annuity
3. You realize that a one-time gift at birth will never fund your daughter’s college education. As a result, you decide to contribute $500 per year to a college savings fund for 15 years. If you assume that you will earn only 5%, how much will you be able to accumulate after 15 years? Present Value of an Annuity
4. You receive a telephone call from the Printer’s Clearinghouse announcing that you are a winner in their annual sweepstakes. You are given a choice of $5000 per year for the next 10 years or $35,000 in cash immediately. All money is tax-free. If you assume an interest rate of 6%, which alternative should you choose in order to maximize the value of what you receive? Part II
5. You purchase your home for $80,000. If real estate in your area appreciates at 5% each year, how much should your home be worth on the market in 10 years assuming that it is in a condition comparable to when you purchased it?
6. You have been contributing $1,000 per year for the past 12 years to your company’s 401(k). The company has provided a 50% match and added to your account annually. If the 401(k) investments have been earning an average of a 12% annual return, how much is your account worth?
7. The local bank is offering a 2-year CD (certificate of deposit) at 8%. How much will you have when a $1,000 CD matures?
8. Your competitor offers you $7,000 per year for the next 5 years for the right to a company patent. You instruct your lawyer to negotiate an immediate lump sum payment instead. Assuming a 6% rate, what is the least you would be willing to accept?
9. A friend borrows $2,000 from you to start a business. She agrees to repay you $2,600 in 3 years. Assuming that you passed up an investment that would have earned you an annual return of 8%, did you get a good deal?
Explanation / Answer
1. Future value of the amount = 2000 * 1.08^18 = 7,992.04
2. Amount paid = 50/1.06^7 = 33.25
3. PV = 0, PMT = 500, N = 15, rate = 5%
use FV function in Excel
amount in 15 years = 10,789.28
4. PMT = 5000, FV = 0, N = 10, rate = 6%
use PV function in Excel
present value of annuity = 36,800.44
so the annuity is better
max of 4 subsections can be answered
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