- Ernesto s rich godfather promises to give him $65,000 on his 28th birthday, 16 years from now. If money is worth 6.75% compounded annually, what is today s value of his promise?

- You win the lottery and will collect $10,000 at the end of each year for the next 25 years. Assuming that money is worth 8.55% compounded annually, what is the value of your prize, in today s dollars?

- You own a manufacturing business and are thinking about purchasing a labor-saving device at a cost of $225,000. The device will last 20 years and save you $1,800 per month in labor costs. You need to earn 9% compounded monthly on your money. What should you do, and why?

A. Buy the device because it is worth more than the $225,000 cost. |

B. Buy the device because you will save a total of $$432,000, and the device costs only $225,000. |

C. Not buy the device because it is worth less than the $225,000 cost. |

4. Manuel wins a $4,000,000 sweepstakes prize. He is given the option of receiving $200,000 at the beginning of each year for 20 years (totaling $4,000,000) or receiving a one-time payment today of $2,400,000. Assuming that Manuel can earn 6.5% compounded annually on his money, what is the real value of the annual payments?

5. Five years ago you bought a 20-year 7.95% $1,000 bond. The bond pays interest each 6 months. You want to sell the bond. You just received the 10th semiannual interest payment of $39.75. Similar bonds are being issued that pay 8.15% semiannually. What is your bond worth today?

6. Stephen Downs was severely injured in a motorcycle accident and will spend the rest of his life in a wheelchair. He successfully sued the party responsible. You, as a member of the jury, are trying to decide what Stephen should receive as a settlement. One part of the settlement is to determine the value of his lost wages. You have determined that Stephen will lose $4,800 a month in wages for the next 35 years because of the accident. Assuming that money is worth 6.35% compounded monthly and the $4,800 would have been received at the end of each month, what is a fair settlement?

7. You leased retail space 12 years ago for $6,450 per month, payable at the beginning of each month. Your lease is for 20 years and allows you to sublease the space. You have decided to move your business to another location and sublease to Thai Pagoda Palace for $8,500 at the beginning of each month for the remainder of the lease. What is the value of your position (referred to as a leasehold interest), assuming that money is worth 6.7% compounded monthly?

8. Paul is a 43-year-old construction worker and decides to start a retirement plan. He figures his income for the next 10 years will be sufficient to deposit $1,000 at the end of each quarter into his retirement plan earning 7.8% compounded quarterly. After 10 years, he will let the money sit for another 13 years, without making additional deposits, until he is 66 years old. What amount will Paul have when he turns 66?

9. Suppose that Carnegie Steel Corporation set aside $245,000 at the end of each quarter for 14 years into a special fund to use for environmental clean-up costs. The fund earns 7.65% compounded quarterly. For the next 6 years, the company increased its deposits to $350,000 per quarter. Find the amount in this account at the end of the 20-year period.

10. So, let's continue to "dream" . . . . remember, you just won $64 million in the lottery. Now the Best Company is offering you $30 million (**TODAY**) in exchange for the 20 installments on your winnings. If your opportunity cost of funds is 8%, What is the Present Value of your $64 million. How did you get your answer. And, finally, now that we have studied the time value of money, would you take the deal?

Subject | Mathematics |

Due By (Pacific Time) | 09/20/2015 12:00 am |

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