BUSI 320 Comprehensive Problem 3 2016 Summer B
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 $ 7500 today.
Option B: Receive a
$1000 gift each year for the next 10 years.
The first $1000 would be
received 1 year from today.
Option C: Receive a
one-time gift of $14,000 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 $2400 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 $2400 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 a year (or
month), and that the rate of return on all yearly investments will be 8.4%
annually.
a) How much
money will Tom and Tricia have in 45 years if they do nothing for the next 10
years, then put $2400 per year away for the remaining 35 years?
b) How much
money will Tom and Tricia have in 10 years if they put $2400 per year away for
the next 10 years?
b2) How much will that 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 $2400 per year away for
each of the next 45 years?
d) How much
money will Tom and Tricia have in 45 years if they put away $200 per MONTH at
the end of each month for the next 45 years?
(Remember to adjust 8.4% annual rate to a Rate per month!)
e) If Tom
and Tricia wait 25 years (after the kids are raised!) before they put anything
away for retirement, how much will they
to put away at the end of each year for 20 years in order to have $1,000,000
saved up on the first day of their retirement 45 years from today?
