1.

Consider an annuity consisting of three cash flows of $8,000 each. If the interest rate is 6%, what is the present value (today) of the annuity if the first cash flow occurs:

a) Today

b) One year from today

c) Two years from today

d) Five years from today

Question 2.

Greg is saving to go on a trip to Australia five years from today. He has determined that she will need to have $13,000 saved to take the trip.

a) How much will he need to invest today in order to have $13,000 in five years? Assume he can earn the following interest rates over the next five years: First year: 3%, Second year 3.5%, Third year: 4%, Fourth year: 5% and Fifth year: 5%

b) Instead of investing the money today, he has decided to wait two years to invest the money. How much will he need to invest, two years from today, in order to have $13,000 five years from today? First year: 3%, Second year 3.5%, Third year: 4%, Fourth year: 5% and Fifth year: 5%

Question 3.

life insurance company is selling an investment policy that will pay you and your heirs $17,500 per year forever, with the first payment starting today. If you require a return on this kind of investment of 6 percent and they sell this policy for $295,000

a) Is this a good investment for you? Show your work.

b) At what rate would you breakeven on this investment, if the first payment is at the end of this year

Question 4.

After 4 years of hard work, 23 - year old Jake graduated with his bachelor’s degree in finance and started job hunting. After several interviews, he has secured two job offers:

Offer from RBC: In the offer from RBC, the starting annual salary is $65,000 and RBC promises that Jake can expect 2.5% annual salary growth.

Offer from TD Bank:

In the offer from TD Bank, the starting annual salary is $70,000, and TD promises that Jake can expect a 1.5% annual salary growth. In addition, TD will award a one-time loyalty bonus of $30,000 on the 25th year anniversary if any employee works at TD for over 25 years and another $50,000 bonus on the 35th year anniversary.

Assuming that Jake will stay with one employer until he retires at age of 65, which job offer should Jake take given a 4% annual interest rate (APR)?

Question 5.

Your daughter just turned 4 years old. You anticipate she will start University when she turns 18. You would like to have funds in a registered education savings plan (RESP) to fund her education at that time. You anticipate she will spend 6 years in university, and it will cost $20,000 per year. She will need the $20,000 at the start of each school year. When she graduates (debt free) you would also like her to have $40,000 for a down payment on a condo or to travel. If the account promises to pay a fixed interest rate (APR) of 6% per year with monthly compounding, how much money do you have to deposit each quarter to ensure you will have enough when she starts university? Assume you will make the same deposit at the end of each quarter until she starts university.

Answer rating: 100% (QA)

1a The present value today of the annuity is 2246859 This is calculated by using the formula PV CF1rn where CF is the cash flow r is the interest rate and n is the number of cash flows Thus for this a... View the full answer