Appendix $14$A $-$ Learning Case

Nam

While passing through Deadwood, SD you play a slot machine to pass a little time. Much to your surprise you win the Jackpot! The machine prints out a ticket telling you to see the cashier for you winnings. The cashier informs you that your winnings are pretty large and that you must choose one of two options for receiving your winnings.

Option $1$: Receive $$20,000$ today.

Option $2$: Receive a payment of $$4,000$ each year for the next six years.

Assume the current interest rate is $8\%.$

Required $(1)$

a$)$ What is the present value of option $1?$

b$)$ What is the present value of option $2?$

c$)$ Which option will you choose?

$n=$

$\frac{\text{I}}{y}r=$

$PV=$

$PMT=$

$FV=$

You have just accepted a new job in a new town. It seems that all the apartments close to your new job location require a two year contract and monthly rental payments. To compare options you decide to determine the present value of each contract you are interested in$.$ Assuming the current APR is $12\%$ answer the questions below.

Required $(2)$

d$)$ What discount rate will you use in your present value calculations?

e$)$ What is the number of periods you will use in your calculation?

Appendix $14$A $-$ Learning Case

Nar

In three years when you graduate you would like to buy a new vehicle. You would like to make a cash down payment when you purchase your vehicle and have decided that you can deposit $$50$ per month into a savings account that will earn $6\%$ interest.

Required $(3)$

f$)$ How much cash will you have in your savings account three years from now when you go to purchase your new vehicle?

$n=\frac{\text{I}}{y}r=$

$PV=$

PMT $=$

$FV=$

When you graduate you have $$12,000$ in student loans to repay. The loans have an annual interest rate of $3\%.$ You must repay your loans with monthly payments and you would like to pay off the loans in $3$ years.

Required $(4)$

g$)$ How much do you need to pay each month to accomplish your goal?

$n=$

$\frac{V}{y}r=$

$PV=,PMT=,FV=$

After graduation you start working for a public accounting firm. You will begin your job on January lst$.$ As part of the firm's compensation structure they offer a yearend bonus $($paid December $31$ st$)$ of $$5,000$ if you reach your work goals. The current market interest rate is $6\%.$

Required $(5)$

h$)$ What is the present value of this bonus?

$n=$

$\frac{\text{I}}{y}r=$

$PV=$

PMT $=$

$FV=$