AAEC 2104 Lecture Notes - Lecture 6: Lump Sum, Interest, Cash Flow

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lavenderhound962

12 Feb 2018

School

Virginia Tech

Department

Agricultural and Applied Economics

Course

AAEC 2104

Professor

Alex White

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Document Summary

Example problem: you deposit as a one time investment in a retirement account that earns an 8 percent annual return (compounded annually) today is worth more than in the future. 3 main reasons: risk, you may not receive that in the future, inflation, an increase in the general price level, opportunity cost, you can do things with that today. Is it a (cid:498)lump sum(cid:499) or an (cid:498)annuity(cid:499) question: lump sum = only 1 cash flow; a 1 time event, annuity = series of cash flows (per month, per year) Determine whether it is pv or fv question: fv = what will it be worth in the future, pv = what is it worth today. Compound interest: earning interest on every 41 in your account. Simple interest: earning interest (cid:498)simply(cid:499) on your initial principal, boo we don"t like simple interest investments, 1 yr ,050, 2 yr - ,102. 50.

Related Questions

Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over time. If you pick the lump sum, you get $2,800 today. If you pick payments over time, you get three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from today.

At an interest rate of 6% per year, the winner would be better off accepting the 1)________ (LUMP SUM or PAYMENTS OVERTIME), since it has the greater present value.

At an interest rate of 9% per year, the winner would be better off accepting 2) ________ (LUMP SUM or PAYMENTS OVERTIME), since it has the greater present value.

3) Years after you win the lottery, a friend in another country calls to ask your advice. By wild coincidence, she has just won another lottery with the same payout schemes. She must make a quick decision about whether to collect her money under the lump sum or the payments over time. What is the best advice to give your friend?

A) The lump sum is always better.

B) The payments over time are always better.

C) It will depend on the interest rate; advise her to get a calculator.

D) None of these answers is good advice.

aquamarinepug18

Your niece just started her college career with a major in economics. She is curious as to the interrelationship between the success of an economy and the financial markets, concepts, and financial institutions. Accordingly, she has developed a list of questions addressing these issues and has asked that you explain the ideas.

1-What are the financial markets and what purposes do they serve?

2-What are financial intermediaries? How do these intermediaries function in the economy?

3-What is a federal government budget deficit? What is the national debt? How does a budget deficit affect the economy?

She is also curious about the time value of money concepts. Specifically, she has the following questions about these concepts:

4-Why are consumers considered to be risk averse? What methods could used to deal with risk?

5-It has been said that a dollar received today is worth more than a dollar received tomorrow. What does this mean and what is the significance to the economy?

6-What is the difference between the present value of a future sum of money and the future value of a present sum of money? What is the significance of these concepts to economics?

7-If you deposited $1,000 in an account paying 6% interest compounded annually, how long would it take to double?

periwinklerhinoceros141

What are the financial markets and what purposes do they serve?

What are financial intermediaries? How do these intermediaries function in the economy?

What is a federal government budget deficit? What is the national debt? How does a budget deficit affect the economy?

She is also curious about the time value of money concepts. Specifically, she has the following questions about these concepts:

Why are consumers considered to be risk averse? What methods could used to deal with risk?

It has been said that a dollar received today is worth more than a dollar received tomorrow. What does this mean and what is the significance to the economy?

What is the difference between the present value of a future sum of money and the future value of a present sum of money? What is the significance of these concepts to economics?

If you deposited $1,000 in an account paying 6% interest compounded annually, how long would it take to double?

lavendermacaw662

AAEC 2104 Lecture Notes - Lecture 6: Lump Sum, Interest, Cash Flow

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