M r. B lo c h irt is c re a tin g a c o lle g e in v e s tm e n t fu n d fo r h is d a u g h te r. H e w ill p u t in $ 8 5 0 p e r y e a r f o r t h e n e x t 1 5 y e a r s a n d e x p e c t s t o e a r n a 8 % a n n u a l r a t e o f r e t u r n . H o w m u c h m o n e y w ill h is d a u g h te r h a v e w h e n s h e s ta rts c o lle g e ?
1
M ik e C a rls o n w ill r e c e iv e $ 1 0 , 0 0 0 a y e a r f r o m th e e n d o f th e th ir d y e a r t o th e e n d o f t h e 1 2 t h y e a r ( 1 0 p a y m e n t s ) . T h e d i s c o u n t r a t e i s 1 0 % . T h e p r e s e n t v a l u e to d a y o f th is d e f e rre d a n n u ity is :
2
S h a r o n S m ith w ill r e c e iv e $ 1 M in 5 0 y e a r s . T h e d is c o u n t r a te is 1 4 . A s a n a lte rn a tiv e , s h e c a n r e c e i v e $ 2 , 0 0 0 t o d a y . W h i c h s h o u l d s h e c h o o s e ? A
. t
B . $
h e $ 1 M
d o l l a r s i n 5 0 y e a r s .
2 , 0 0 0 t o d a y .
C
. s
h e s h o u l d b e i n d i f f e r e n t .
D
. n
e e d m o r e i n f o r m a t i o n .
3
2 3 . A s s u m e t h a t y o u r r e q u i r e d r a te o f r e tu r n i s 1 2 p e r c e n t a n d y o u a r e g i v e n t h e f o l l o w i n g s tr e a m
Y e a r
C a s h F lo w
0
$ 1 0 ,0 0 0
1
1 5 ,0 0 0
2
1 5 ,0 0 0
3
1 5 ,0 0 0
4
1 5 ,0 0 0
5
2 0 ,0 0 0
o f c a s h f l o w s :
I f p a y m e n ts a re m a d e a t th e e n d o f e a c h p e rio d , w h a t is th e p r e s e n t v a lu e o f t h e c a sh f lo w
s t r e a m ?
$ 6 6 , 9 0 9 , b . $ 5 7 , 3 2 3 , c . $ 6 1 , 8 1 5 , d . $ 5 2 , 3 4 5 , e . $ 6 2 , 0 2 9
4
2 4 . S b a n k b e p a m u s t c o m p y e a r. tw o b
te o id b o W a
a k s G a lo r e f f e r s to le n a t th e e n d e r e p a id a t u n d in g (3 6 h a t is th e n k s ?
n e e d s to a rra n g e d th e r e q u ir e d $ 1 o f e a c h q u a r te r . th e e n d o f th e y e 5 - d a y y e a r), w ith d iffe re n c e in th e
f i n a n c in g f o r i t s e x p a n s io n p r o g r a m . O n e ,0 0 0 ,0 0 0 o n a lo a n w h ic h r e q u ir e s in te r e s t to T h e q u o te d r a te is 1 0 p e r c e n t, a n d th e p r in c ip a l a r. A s e c o n d le n d e r o f f e rs 9 p e r c e n t, d a ily in te re s t a n d p r in c ip a l d u e a t th e e n d o f th e e f f e c ti v e a n n u a l r a t e s ( E F F % ) c h a r g e d b y t h e
5
w a n t to o rro w , 1 ,1 2 0 a t th e e n d o f ts y o u to p a y h e r $ 1 1 0 a t th e e n d o f t h e u n d e r y o u r f rie n d 's
th e y 0 o f i 1 2 th p r o p o
ro e n m
m a r e n o r o a r. S h e a g re e s t o te re st a t th e e n d o n th . H o w m u c s a l th a n u n d e r y o
n e y e le n d o f e a h h ig u r p r
a r, a n y o u p ro p o s e y o u th e $ 1 ,0 0 0 , b u t c h o f t h e firs t 1 1 m o h e r is th e e ffe c tiv e a o p o s a l ?
to p a y s h e n th s p lu s n n u a l
6
K e n b o r r o w s $ 1 5 ,0 0 0 f r o m a b a n k a t 1 0 p e r c e n t a n n u a lly c o m p o u n d e d in te re s t to b e re p a id in s ix e q u a l in s ta llm e n ts . C a lc u la te th e in te re s t p a id in t h e t w e l f t h y e a r .
7
C o n g r a tu j u s t i n f o r p a y s $ 1 , 7 n o w . W h
la tio m e d 5 0 ,0 ic h w
n s ! Y o u y o u th a t 0 0 to d a y o u ld y o
h a v e ju s y o u c a n . C h o ic e u c h o o se
t w ta Y a
o n th k e y o p a y s n d w h
e lo tte u r w in $ 1 ,0 0 y w o u
ry ! H o w n in g s in 0 ,0 0 0 a t ld y o u c
e v e o n e th e h o o
r, th e lo tte ry b u re a u h a s o f tw o w a y s . C h o ic e X e n d o f fiv e y e a rs fro m s e i t ?
8
A n e m p lo y e e a n d e m p lo y e r c o n tr ib u te a to ta l o f $ 3 ,0 0 0 a n n u a lly f o r 2 0 y e a r s to a r e tir e m e n t a c c o u n t th a t e a r n s 9 p e rc e n t a y e a r , h o w m u c h w ill t h e e m p lo y e e b e a b le to w i t h d r a w f r o m t h e a c c o u n t a n n u a l l y f o r t h e n e x t 2 5 y e a r s ?
9
