A) Your great aunt Tullula has left you a $1,000,000 in her will. You never met...

    

Transcribed Image Text:

A) Your great aunt Tullula has left you a $1,000,000 in her will. You never met your great aunt, but you know that she had a reputation for being cautious in how she spent her money. So it comes as no surprise that the will stipulates that the money is collectable in 10 yearly installments of $100,000 starting today. 1) Why is this inheritance not really $1,000,000? 2) What is it really worth today if money can be invested at 10% annual interest, compounded monthly? 3) Use a spreadsheet to construct a table showing the present worth of each installment, and the total present worth of the cash flow. Note: You cannot submit a spreadsheet file as part of your answer, you must type out or write out by hand your solution. Part B) You want to buy a house and decide to try to negotiate with the executors of your great aunt Tullula's will. You would like $300,000 today and the balance of your inheritance in five years' time. Assuming that annual interest remains the same at 10% compounded monthly, how much will the payment be in five years? Part C) As a backup plan, in case the executors will not agree to your alternative payment scheme you have been doing some research on two possible investments for your money. The first pays 1% per month, compounded monthly, and the second pays 6% per six months, compounded every six months. 1) What is the effective semiannual interest rate for each investment? 2) What is the effective annual interest rate for each investment? 3) Based on interest rates: i. ii. Which investment do you prefer? Does your decision depend on whether you make the comparison based on an effective six-month rate or an effective one-year rate? A) Your great aunt Tullula has left you a $1,000,000 in her will. You never met your great aunt, but you know that she had a reputation for being cautious in how she spent her money. So it comes as no surprise that the will stipulates that the money is collectable in 10 yearly installments of $100,000 starting today. 1) Why is this inheritance not really $1,000,000? 2) What is it really worth today if money can be invested at 10% annual interest, compounded monthly? 3) Use a spreadsheet to construct a table showing the present worth of each installment, and the total present worth of the cash flow. Note: You cannot submit a spreadsheet file as part of your answer, you must type out or write out by hand your solution. Part B) You want to buy a house and decide to try to negotiate with the executors of your great aunt Tullula's will. You would like $300,000 today and the balance of your inheritance in five years' time. Assuming that annual interest remains the same at 10% compounded monthly, how much will the payment be in five years? Part C) As a backup plan, in case the executors will not agree to your alternative payment scheme you have been doing some research on two possible investments for your money. The first pays 1% per month, compounded monthly, and the second pays 6% per six months, compounded every six months. 1) What is the effective semiannual interest rate for each investment? 2) What is the effective annual interest rate for each investment? 3) Based on interest rates: i. ii. Which investment do you prefer? Does your decision depend on whether you make the comparison based on an effective six-month rate or an effective one-year rate?

Answer rating: 100% (QA)

A 1 This inheritance is not really 1000000 because the money is not collectable all at once The will ... View the full answer