20) When you retire 40 years from now, you want to have $1.2 million. You think
ID: 2695014 • Letter: 2
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20) When you retire 40 years from now, you want to have $1.2 million. You think you can earn an average of 12 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 2 years from today. How much more will you have to deposit as a lump sum if you wait for 2 years before making the deposit? 21) You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years. Assume you can earn 6 percent on your savings. Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different. 23) You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your money. Which option should you take and why?Explanation / Answer
20) [1.2/(1.12)^38 - 1.2/(1.12)^40 ] * 10^6 = $ 3280.78 ; 21) PV ( of 20,000 today ) = 20000/1.06^10 = 11167.89 > 10000... i will choose 20000 after 10 years ; 23) PV ( for monthly payments ) = 1400 [ 1/1.005^240 + 1/1.005^239 +.........1/1.005) = $ 195,413.08 < 200,000 ... so i will take 200,000 today as lump-sumRelated Questions
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