Question

Use the tools introduced in this chapter to answer the following questions. You have to decide which tool to use in each case. Explain your conclusions.
a. An investor purchases a $5,000 investment certificate that pays 8 percent interest per year, compounded semi-annually. How much will the investor receive when the certificate matures in five years? Assume the appropriate discount rate is 10 percent.
b. An investor is offered a choice of three possible investments. In each case, the investor must invest $1,000. The first investment will pay the investor $2,500 at the end of year five. The second will pay $500 in one year, $650 in two years, $800 in three years, $200 in four years, and $100 in five years. The third investment will pay $400 at the end of each of the next five years. If the investor's discount rate is 10 percent, which is the most attractive investment?
c. A retiring teacher has the opportunity to receive $10,000 per year for the next 20 years. If the teacher's discount rate is 7 percent, what is the most she should pay for this investment?
d. An entity borrows $50,000 at 9 percent for three years. Interest and principal must be paid in full in three years, at the end of the term of the loan. How much will the entity have to pay the lender in three years? Assume the appropriate discount rate is 10 percent.
e. You are offered a choice of receiving $1,000 today or $1,500 in three years. If your discount rate is 10 percent, which alternative would you prefer? Would your choice change if your discount rate is 15 percent?
f. A contest advertises that the winner wins $50,000,000. The $50,000,000 prize is paid in equal instalments over 25 years, with the first payment being made one year from the date the contest winner is announced. What is the "real" (present) value of the prize? Assume a discount rate of 8 percent.



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  • CreatedFebruary 26, 2015
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