After retiring from the Cupcake War business, Clive gives $415,000 as a first instalment of inheritance to
Question:
After retiring from the Cupcake War business, Clive gives $415,000 as a first instalment of inheritance to his 18-year-old grandson, Gary.
Task 1
To ensure that Gary does not squander his inheritance, Clive's accountant advises him to put his money into a long-term savings account. In total, Gary has $415,000. The Bank of Melbourne offers a high interest savings account of 1.21% compounded monthly, while Westpac Bank offers 1.34% but will only compound annually. How much will Gary's investment be worth in 20 years at each bank?
Task 2
Diamond Wealth Co. is trying to sell Gary an investment policy that will pay him and his future family heirs $10,500 per year forever. If the required return on this investment is 2.37%, how much will Gary pay for the policy? Can Gary afford this investment using inheritance that his grandfather gave him? Elaborate.
Task 3
Given the inheritance from his grandfather, Gary is abandoning his dream to become a medical doctor but instead will train to be an e-sport athlete. As a part of his training, he is looking to purchase an Alienware M17 R6 gaming laptop with a cash price of $7,950. Alternatively, Gary can pay interest-free and with no deposit the full price of $8,315 due in three years. However, as he has already spent his money on a holiday, he does not have the cash available right now. He could use the store's low interest rate card and buy now. The low interest rate is 9.75% per annum and requires a one-off payment of the full amount owed in 24 months' time.
Which is the better option - buying the laptop today for $7,950 and paying interest on the store card, or paying nothing today and instead pay the retailer $8,315 in three years?
Task 4
Gary would like to save for the deposit for an apartment. In addition to the $15,000 cash gift, he has other savings of $23,000. As he is living at home, he is confident he can save $17,000 each year while there. He plans to move out of home in early 2024. He would like to open a savings account today (being 1 January 2022) that pays a fixed interest rate of 1.72% per annum. He would immediately deposit his cash gift and original saving and then at the end of each year deposit $17,000 (i.e., on 31 December 2022, 31 December 2023 and 31 December 2024). Gary plans to close the savings account on 31 December 2024.
How much would Gary expect to have saved by 31 December 2024?
Intermediate Accounting
ISBN: 978-0176509736
10th Canadian Edition, Volume 1
Authors: Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young,