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Which set of Cash Flows is worth more now? Assume that yourgrandmother wants to give you generous gift. She wants you tochoose which one of the following sets of cash flows you would liketo receive: Option A: Receive a one-time gift of $10,000 today.Option B: Receive a $1600 gift each year for the next 10 years. Thefirst $1600 would be received 1 year from today. Option C: Receivea one-time gift of $20,000 10 years from today.

Compute the Present Value of each of these options if you expectthe interest rate to be 3% annually for the next 10 years. Which ofthese options does financial theory suggest you shouldchoose?

Option A would be worth ______ today. Option B would be worth _____today. Option C would be worth _____ today. Financial theorysupports choosing Option ____

Compute the Present Value of each of these options if you expectthe interest rate to be 6% annually for the next 10 years. Which ofthese options does financial theory suggest you shouldchoose?
Option A would be worth ____ today. Option B would be worth $_____today. Option C would be worth $_____ today. Financial theorysupports choosing Option ____

Compute the Present Value of each of these options if you expect tobe able to earn 10% annually for the next 10 years. Which of theseoptions does financial theory suggest you should choose?
Option A would be worth _____ today. Option B would be worth _____today. Option C would be worth _____ today. Financial theorysupports choosing Option _____

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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

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BUSI 320 Comprehensive Problem 3 SUMMER D

Use what you have learned about the time value of money to analyze each of the following decisions:

Decision #1: Which set of Cash Flows is worth more now?

Assume that your grandmother wants to give you generous gift. She wants you to choose which one of the following sets of cash flows you would like to receive:

Option A: Receive a one-time gift of $ 9000 today.

Option B: Receive a $1400 gift each year for the next 10 years. The first $1400 gift would be

received 1 year from today.

Option C: Receive a one-time gift of $18,000 10 years from today.

Compute the Present Value of each of these options if you expect the interest rate to be 3% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $__________ today.

Option B would be worth $__________ today.

Option C would be worth $__________ today.

Financial theory supports choosing Option _______

Compute the Present Value of each of these options if you expect the interest rate to be 7% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $__________ today.

Option B would be worth $__________ today.

Option C would be worth $__________ today.

Financial theory supports choosing Option _______

Compute the Present Value of each of these options if you expect to be able to earn 10% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $__________ today.

Option B would be worth $__________ today.

Option C would be worth $__________ today.

Financial theory supports choosing Option _______

Decision #2 begins at the top of page 2!

Decision #2: Planning for Retirement

Tom and Tricia are 22, newly married, and ready to embark on the journey of life. They both plan to retire 45 years from today. Because their budget seems tight right now, they had been thinking that they would wait at least 10 years and then start investing $1800 per year to prepare for retirement. Tricia just told Tom, though, that she had heard that they would actually have more money the day they retire if they put $1800 per year away for the next 10 years - and then simply let that money sit for the next 35 years without any additional payments – then they would have MORE when they retired than if they waited 10 years to start investing for retirement and then made yearly payments for 35 years (as they originally planned to do). Please help Tom and Tricia make an informed decision:

Assume that all payments are made at the END of the year, and that the rate of return on all yearly investments will be 8% annually.

(Please do NOT ROUND when entering “Rates” for any of the questions below)

How much money will Tom and Tricia have in 45 years if they do nothing for the next 10 years, then put $1800 per year away for the remaining 35 years?

How much money will Tom and Tricia have in 10 years if they put $1800 per year away for the next 10 years?

b2) How much will the amount you just computed grow to if it remains invested for the remaining

35 years, but without any additional yearly deposits being made?

c)How much money will Tom and Tricia have in 45 years if they put $1800 per year away for each of the next 45 years? (This amount can be referred to as their “retirement nest egg”)

Using your solution to question C, what is the value in today's dollars, assuming 3% average inflation, of Tom and Tricia's retirement nest egg? (“Today” Tom and Tricia are 22 years old. Retirement is 45 years away!)

e)If Tom and Tricia wait 25 years (after the kids are raised!) before they put anything away for retirement, how much will they have to put away at the end of each year for 20 years assuming an annual interest rate of 8% in order to have $700,000 saved up on the first day of their retirement 45 years from today?

Can you please indicate the correct answers from my quiz. If you give the answers I can figure out what I did wrong.

Which one of the following statements is correct?
Select one:
a. The present value of an annuity increases when the interest rate decreases.
b. The future value of an annuity is unaffected by the amount of each annuity
payment.
c. The future value of an annuity increases when the interest rate decreases.
d. The present value of an annuity is unaffected by the number of the annuity
payments.
e. The present value of an annuity increases when the interest rate increases

Augusta Acres is planning a major expansion for 3 years from today. In preparation
for this, the company is setting aside $30,000 each quarter, starting today, for the
next 3 years. How much money will the firm have when it is ready to expand if it
can earn an average of 7.5 percent on its savings?
Select one:
a. $594,165
b. $486,152
c. $407,038
d. $552,712
e. $399,546

financed this purchase at 8.25 percent interest with monthly payments of
$2,379.45. How many years will it take the firm to pay off this debt?
Select one:
a. 5.0 years
b. 3.5 years
c. 4.5 years
d. 3.0 years
e. 4.0

You are comparing two investments, both of which provide annuity payments in
exchange for a lump sum investment today. Each annuity is for a period of 25
years and each pays $500 a month. You require a 7 percent return on these
investments. Annuity A pays at the beginning of each month and annuity B pays at
the end of each month. Given this information, which one of the following
statements is correct?
Select one:
a. Annuity B is worth more today because of the timing of its cash flows.
b. Both annuities are equally valuable today.
c. Annuity A has a higher present value and a lower future value than annuity
B.
d. Annuity A has both a higher present value and a higher future value than
annuity B.
e. Annuity A is worth more today because you will receive 25 payments
whereas Annuity B only pays 24 payments.

The Corner Bank pays 4 percent interest, compounded monthly, on its savings
accounts. The Uptown Bank pays 4 percent interest, compounded quarterly, on its
savings accounts. You want to deposit sufficient funds today so that you will have
$2,400 in your account 3 years from today. The amount you must deposit today:
Select one:
a. will be greater if you invest with The Corner Bank.
b. is the same regardless of which bank you choose because they both pay 4
percent interest.
c. is the same regardless of which bank you choose because they both pay
compound interest.
d. will be greater if you invest with The Uptown Bank.
e. is the same regardless of which bank you choose because they both pay
simple interest.

The Mailbox Co. invested $50,000 at 7.5 percent compounded annually for 2
years. How much interest on interest did the company earn over this period of
time?
Select one:
a. $3,750.00
b. $4,614.83
c. $281.25
d. $7,781.25
e. $7,500.00

Show ALL work

It will help to use the timeline to outline the following problems.

1. You decide to begin saving for a new car to purchase in five years. If you put $1,000 at the end
of each of the next 5 years in a savings account paying 6% compounded annually, how much will you accumulate after 5 years?

2. James Smith has a 4-year ordinary annuity that pays $1,000 per year and has an interest rate of 6%. a. Calculate the future value of this ordinary annuity.

b. Assuming this was an annuity due, calculate the future value of this annuity.

3. You have contacted a number of car dealerships to determine the best interest rate on a new automobile loan. A Ford dealership has quoted you a 5-year, 10% loan in the amount of $35,000 that will require monthly payments.

a. What is the monthly loan payment?

b. What will be the loan‘s effective annual interest rate (EAR)?

4. Marcus has won the grand prize in a lottery and must choose between the following three options: a. Receive a lump sum payment of $9,000,000.

b. Receive annual end of the year payments of $1,000,000 for the next 12 years.
c. Receive annual end of the year payments of $1,500,000 for the next 8 years.
a. Which option should Marcus choose based on an annual investment rate of 8%?

5. How much money does Kristi need to have in her retirement savings account today if she wishes to withdraw $25,000 per year for 30 years? She expects to earn an average rate of 8%.

decide to begin saving towards the purchase of a new car in 5 years. If you put $1,000 at the end

6. What is the future value of $4,900 invested for 8 years at 7 percent compounded semiannually?

7. In 2005, soccer player David Beckham signed a contract reported to be worth $51 million. The contract called for $2 million immediately and $10 million in 2006. The remaining $39 million was to be paid as $9 million in 2007, $7 million in 2008, $6 million in 2009, $5 million in 2010, $4 million in 2011 and in 2012, $2 million in 2013, and $1 million in 2014 and 2015. Assuming all the payments, except the first $2 million are paid at the end of each year and the discount rate is 9%, what kind of deal did the soccer player snag?

8. What is the present value of the following set of cash flows at a 10% discount rate? Year 1 2 3 4
Cash Flow $600 –$600 $600 –$600

9. What is the future value of the set of cash flows (from the previous problem) 4 years from now? Assume an interest rate of 10%.

10. Starting today, George is going to contribute $300 on the first of each month to his retirement account. His employer will contribute an additional 50% of the amount George contributes. If both George and his employer continue to do this and he can earn a monthly rate of .68%, how much will George have in his retirement account 35 years from now?

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