Purpose: Understand how calculating present value helps us make decisions

KSAs: Understanding of present value calculations

Points: 10

Admin: This is a multi-part question. There are no minimum work counts but you must answer the question in full.

Discussion Initial Response Due by Wednesday: It is payday! You look at your pay stub and realize you received a $4,500 bonus. What do you plan to do with your windfall? You have three choices: (1) buy a bond, (2) pay off a loan, or (3) loan the money to family.

Part 1: Using the present value charts in this link (lump sum) and this link (annuity), calculate present value of the three options. Do not forget to show your work.

Part 2: Do you have enough money for this option.

Part 3: Discuss which option you would choose and why. Consider financial and non-financial influences.

Discussion Response Due by Saturday: Respond to another student. Part 3 incorporates others' opinions. Please be respectful when addressing part 3.

Option	Information	Present Value Formula	PV Answer	Do you have enough money?
Example	Calculate the present value of investing in a start-up company if you expect to receive $5,000 in 4 years and the annual market rate is 6%. Remember to use the Present Value factor in your calculation.	$5,000 X .79209	$3,960.45	Yes/No
#1	Buy a bond. The bond pays $4,500 at the end of 2 years with a 12% coupon (interest) paid semi-annually (every 6 months). Calculate the present value of the bond. *Remember there are 4 steps to this analysis (PV of the bond, interest payments, PV of the interest payments, sum of the two PV calculations).
#2	Pay off a loan. The loan is due at the end of 2 years (balloon loan). It has a balance of $5,500 and an interest rate of 11% that accrues annually. The bank said they will take the present value of the loan. Calculate the present value of the loan.
#3	Lend $4,500 to your family for a home renovation. They will pay you $5,000 at the end of the 2 years. The annual market rate is 7%. Calculate the present value of your loan to your family.