Use the appropriate interest table from Appendix B to complete the following exercises. The answers appear at the end of the assignment material for this chapter, p. 516–517.

1. It is your sixtieth birthday. You plan to work 5 more years before retiring, at which point you and your spouse want to take €25,000 for a round-the-world tour. What lump sum do you have to invest now to accumulate the €25,000? Assume that your minimum desired rate of return is:

(a). 5 per cent, compounded annually.

(b). 10 per cent, compounded annually.

(c). 20 per cent, compounded annually.

2. You want to spend €2,000 on a vacation at the end of each of the next 5 years. What lump sum do you have to invest now to take the five vacations? Assume that your minimum desired rate of return is:

(a). 5 per cent, compounded annually.

(b). 10 per cent, compounded annually.

(c). 20 per cent, compounded annually.

3. At age 60, you find that your employer is moving to another location. You receive termination pay of €100,000. You have some savings and wonder whether to retire now.

(a). If you invest the €100,000 now at 5 per cent, compounded annually, how much money can you withdraw from your account each year so that at the end of 5 years there will be a zero balance?

(b). Answer part a, assuming that you invest it at 10%.

4. Two football players, LeBron and Kobe, signed 5-year, €60-million contracts. At 16 per cent, compounded annually, which of the following contracts is more desirable in terms of present values? Show computations to support your answer.

Data from Appendix B

Transcribed Image Text:

Annual cash Inflows (in thousands) LeBron Kobe Year 12345 €20,000 16,000 12,000 8,000 4,000 €60,000 € 4,000 8,000 12,000 16,000 20,000 €60,000