34. Time value of money (hint-see chapter 4) You may use a financial calculator

Question

34. Time value of money (hint-see chapter 4) You may use a financial calculator or spreadsheet to compute your answers. Suppose you are told that your uncle is going to sell his company in 3 years and give you half the value of the company. The total value of the company is $1 million. What is the present value of the money you will receive, assuming a discount rate of 8%? a. You are faced with some expensive home repairs, due to flood damage for which you do not have insurance. The contractor tells you that you can repair the damage now, at a cost of $25,000, but if you wait, the cost will increase due to mold and rot that will likely set in. He estimates that the costs will rise to $30,000 if you wait a year. If you do the repairs now, you will have to put the cost on your credit card at 14% interest. But if you wait, you can pay cash and not pay any interest. Should you wait or do the repairs now? (Hint: see Example 4-4.) b.

Explanation / Answer

present value of the money = 1,000,000*0.5/1.083 = 396,916.12

future value if you pay using credit card = 25,000 * 1.14

future value if you pay using credit card = 28,500............so it is worth paying it immediately instead of paying 30,000 in a year

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