8. You are offered $900 five years from mow or $150 at the end of each year for
ID: 2636982 • Letter: 8
Question
8. You are offered $900 five years from mow or $150 at the end of each year for the next five years. If you can earn 6 percent on your funds, which offer will you accept? if you can earn 14 percent on your funds, which offer will you accept? Why are your answers different? 9. The following questions illustrate nonannual compounding. a) one hundred dollars is placed in an account that pays 12 percent How much will be in the account after one year if interest is compounded annually, semiannually, or monthly? b) One hundred dollars is to be received after one year. What is the present value of this amount if you can earn 12 percent compounded annually, semiannually, or monthly? 7 10. At the end of each year, Tom invests $2,000 in a retirement account Joan also invests $2,000 in a retirement account but makes her deposits at the beginning of each year. They both earn 9 percent on their funds. How much will each have in his or her account at the end of 20 years? 11. You purchase a $100,000 life insurance policy for a single payment of $35,000.1f you want to earn 9 percent on invested funds, how soon must you die for the policy to have been the superior alternative? If you die within ten years, what is the return on the investment in life insurance? (Morbid questions, but you might want to view life insurance as an investment alternative. As one financial planner told the author: Always look at the numbers; analyze life Insurance as an investments)Explanation / Answer
Answer If earning 6%
Scenerio 1 present value of $ 900 received 5 years = $900 * .747 ( discounting factor of 5 years)
= $ 672.53
Scenerio 2
Year
Amount
Pv factor(6%)
Present value
1
150
0.94
141.50
2
150
0 .89
133.50
3
150
0.84
125.94
4
150
0.79
118.81
5
150
0.74
112.08
Total
631.83
Conclusion: Accept scenerio 1
If earning 14%
Scenerio 1 present value of $ 900 received 5 years = $900 * .519 ( discounting factor of 5 years)
= $ 467.43
Scenerio 2
Year
Amount
Pv factor(6%)
Present value
1
150
0.877
131.55
2
150
0 .769
115.35
3
150
0.674
101.1
4
150
0.592
88.8
5
150
0.519
77.85
Total
514.65
Conclusion: Accept scenerio 2
Year
Amount
Pv factor(6%)
Present value
1
150
0.94
141.50
2
150
0 .89
133.50
3
150
0.84
125.94
4
150
0.79
118.81
5
150
0.74
112.08
Total
631.83
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