BUSI 320 Comprehensive Problem 3 FALL 2019
Use what you have learned about the time value of money toanalyze each of the following decisions:
Decision #1: Which set of Cash Flows is worth more now? Assumethat your grandmother wants to give you generous gift. She wantsyou to choose which one of the following sets of cash flows youwould like to receive:
Option A: Receive a one-time gift of $ 10,000 today.
Option B: Receive a $1500 gift each year for the next 10 years.The first $1400 would be received 1 year from today.
Option C: Receive a one-time gift of $18,000 10 years fromtoday.
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 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 expectthe interest rate to be 6% annually for the next 10 years. Which ofthese 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 expectto be able to earn 9% annually for the next 10 years. Which ofthese 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: Planningfor Retirement Erich and Mallory are 22, newly married, and readyto embark on the journey of life. They both plan to retire 45 yearsfrom today. Because their budget seems tight right now, they hadbeen thinking that they would wait at least 10 years and then startinvesting $3000 per year to prepare for retirement. Mallory justtold Erich, though, that she had heard that they would actuallyhave more money the day they retire if they put $3000 per year awayfor the next 10 years - and then simply let that money sit for thenext 35 years without any additional payments – then they wouldhave MORE when they retired than if they waited 10 years to startinvesting for retirement and then made yearly payments for 35 years(as they originally planned to do). Please help Erich and Mallorymake an informed decision: Assume that all payments are made at theEND a year (or month), and that the rate of return on all yearlyinvestments will be 7.2% annually. (Please do NOT ROUND whenentering “Rates†for any of the questions below)
a) How much money will Erich and Mallory have in 45 years ifthey do nothing for the next 10 years, then put $3000 per year awayfor the remaining 35 years?
b) How much money will Erich and Mallory have in 10 years ifthey put $3000 per year away for the next 10 years?
b2) How much will the amount you just computed grow to if itremains invested for the remaining 35 years, but without anyadditional yearly deposits being made?
c) How much money will Erich and Mallory have in 45 years ifthey put $3000 per year away for each of the next 45 years? Howmuch money will Erich and Mallory have in 45 years if they put away$250 d) 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 Erich and Mallory wait 25 years (after the kids areraised!) before they put anything away for retirement, how muchwill they have to put away at the end of each year for 20 years inorder to have $1,000,000 saved up on the first day of theirretirement 45 years from today?
