Liberty University BUSI 320 Textbook
Assignment 3 Comprehensive Problem 3 solutions answers right
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 $10,000
today.
Option
B: Receive a $1,500 gift each year for
the next 10 years. The first $1,500 would be received 1 year from today.
Option
C: Receive a one-time gift of $16,500 10
years from today.
Compute the Present Value of each of
these options if you expect the interest rate to be 2% 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 5% 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 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 _______
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 $2,100 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 $2,100
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 7.2% annually.
(Please
do NOT ROUND when entering “Rates” for any of the questions below)
a) How
much money will Tom and Tricia have in 45 years if they do nothing for the next 10 years, then put $2,100 per year away for
the remaining 35 years?
b) How
much money will Tom and Tricia have in 10 years if they put $2,100 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 $2,100 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 $175 per MONTH at the end of each month
for the next 45 years? (Remember to adjust 7.2% 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 have to put away at
the end of each year for 20
years in order to have $700,000 saved up on the first day of their retirement
45 years from today?
This assignment is due by 11:59 p.m.
(ET) on Monday of Module/Week 5.
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