Decision #1: Which set of Cash Flows is worth more now? Assume that your grandmother wants to...

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Finance

Decision #1:   Which set of Cash Flows isworth more now?
Assume that your grandmother wants to give you generousgift. She wants you to choose which one of the following sets ofcash flows you would like to receive:
Option A: Receive a one-time gift of $ 7500 today.
Option B: Receive a $1000 gifteach year for the next 10 years. The first $1000 wouldbe
    received 1 year from today.
Option C: Receive a one-time gift of $15,000 10 yearsfrom today.
Compute the Present Value of each of these optionsif you expect the interest rate to be 3% annually for the next 10years.    Which of these options does financialtheory suggest you should choose?
       Option A would be worth$__ today.
      Option B would be worth$ today.
       Option C would be worth$ today.
       Financial theory supportschoosing Option _

Compute the Present Value of each of these optionsif you expect the interest rate to be 7% annually for the next 10years. Which of these options does financial theory suggest youshould choose?
       Option Awould be worth $ today.
       Option B would be worth$ today.
       Option C would be worth$ today.
      Financial theory supportschoosing Option _
Compute the Present Value of each of these optionsif you expect to be able to earn 10% annually for the next 10years. Which of these options does financial theory suggest youshould choose?
       Option Awould be worth $__ today.
       Option B would be worth$ today.
       Option C would be worth$ today.
       Financial theory supportschoosing Option _
Decision #2 begins at the top of page 2!
Decision #2: Planning forRetirement
Luke and Olivia are 22, newly married, and ready to embark onthe 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 $2100 per year to prepare for retirement. Olivia justtold Luke, though, that she had heard that they would actually havemore money the day they retire if they put $2100 per year away forthe next 10 years - and then simply let that money sit for the next35 years without any additional payments – then they would haveMORE 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 Luke and Olivia make an informeddecision:
Assume that all payments are made at the END a year(or month), and that the rate of return on all yearly investmentswill be 7.2% annually.
How much money will Luke and Olivia have in 45 years if they donothing for the next 10 years, then put $2100 per yearaway for the remaining 35 years?
How much money will Luke and Olivia have in 10 years if theyput $2100 per year away for the next 10 years?
b2) How much will that amount you just computed grow to if itremains invested for the remaining
35 years, but without any additional yearly deposits beingmade?
How much money will Luke and Olivia have in 45 years if theyput $2100 per year away for each of the next 45 years?
How much money will Luke and Olivia have in 45 years if theyput away $175 per MONTH at the end ofeach month for the next 45 years? (Remember to adjust7.2% annual rate to a Rate per month!)
If Luke and Olivia wait 25 years (after the kids are raised!)before they put anything away for retirement, how much will they toput away ***at the end of* *each year***for 20 years in order to have $1,000,000 saved up on the first dayof their retirement 45 years from today?

Answer & Explanation Solved by verified expert

3.8 Ratings (516 Votes)

Decision 1 Formula Amount A Number of paymentsDuration n Interest rate pa r PV of Amount A Interest rate pa r PV of Amount A Interest rate pa r PV of Amount A PV is the amount A received today Option A 7500 0 See Answer

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Transcribed Image Text

Decision #1: Which set of Cash Flows isworth more now?Assume that your grandmother wants to give you generousgift. She wants you to choose which one of the following sets ofcash flows you would like to receive:Option A: Receive a one-time gift of $ 7500 today. Option B: Receive a $1000 gifteach year for the next 10 years. The first $1000 wouldbe received 1 year from today. Option C: Receive a one-time gift of $15,000 10 yearsfrom today.Compute the Present Value of each of these optionsif you expect the interest rate to be 3% annually for the next 10years. Which of these options does financialtheory suggest you should choose? Option A would be worth$__________ today. Option B would be worth$__________ today. Option C would be worth$__________ today. Financial theory supportschoosing Option _______ Compute the Present Value of each of these optionsif you expect the interest rate to be 7% annually for the next 10years. Which of these options does financial theory suggest youshould choose? Option Awould be worth $__________ today. Option B would be worth$__________ today. Option C would be worth$__________ today. Financial theory supportschoosing Option _______Compute the Present Value of each of these optionsif you expect to be able to earn 10% annually for the next 10years. Which of these options does financial theory suggest youshould choose? Option Awould be worth $__________ today. Option B would be worth$__________ today. Option C would be worth$__________ today. Financial theory supportschoosing Option _______Decision #2 begins at the top of page 2!Decision #2: Planning forRetirementLuke and Olivia are 22, newly married, and ready to embark onthe 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 $2100 per year to prepare for retirement. Olivia justtold Luke, though, that she had heard that they would actually havemore money the day they retire if they put $2100 per year away forthe next 10 years - and then simply let that money sit for the next35 years without any additional payments – then they would haveMORE 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 Luke and Olivia make an informeddecision: Assume that all payments are made at the END a year(or month), and that the rate of return on all yearly investmentswill be 7.2% annually.How much money will Luke and Olivia have in 45 years if they donothing for the next 10 years, then put $2100 per yearaway for the remaining 35 years?How much money will Luke and Olivia have in 10 years if theyput $2100 per year away for the next 10 years?b2) How much will that amount you just computed grow to if itremains invested for the remaining35 years, but without any additional yearly deposits beingmade?How much money will Luke and Olivia have in 45 years if theyput $2100 per year away for each of the next 45 years?How much money will Luke and Olivia have in 45 years if theyput away $175 per MONTH at the end ofeach month for the next 45 years? (Remember to adjust7.2% annual rate to a Rate per month!)If Luke and Olivia wait 25 years (after the kids are raised!)before they put anything away for retirement, how much will they toput away at the end of each yearfor 20 years in order to have $1,000,000 saved up on the first dayof their retirement 45 years from today?