BUSI 320 Comprehensive Problem 3 Use what youhave learned about the time value of money

BUSI 320 Comprehensive Problem 3

Use what youhave learned about the time value of money to analyze each of the followingdecisions:

Decision #1: Whichset of Cash Flows is worth more now?

Assume that your grandmother wants to giveyou generous gift. She wants you tochoose which one of the following sets of cash flows you would like to receive:

Option A: Receive a one-time gift of $ 9000 today.

OptionB: Receive a $1300 gift each year forthe next 10 years. The first $1300 wouldbe

received 1 year from today.

Option C: Receive a one-time gift of $15,000 10 yearsfrom today.

Computethe Present Value of each of these options if you expect the interest rate tobe 3% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $__________today.

Option B would be worth $__________today.

Option C would be worth $__________today.

Financial theory supports choosing Option_______

Computethe Present Value of each of these options if you expect the interest rate tobe 6% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

Option A would be worth $__________ today.

Option B would be worth $__________today.

Option C would be worth $__________today.

Financial theory supports choosing Option_______

Computethe Present Value of each of these options if you expect to be able to earn 9%annually for the next 10 years. Which ofthese options does financial theory suggest you should choose?

Option A would be worth $__________ today.

Option B would be worth $__________today.

Option C would be worth $__________today.

Financial theory supports choosingOption _______

Decision #2 begins at the top ofpage 2!

Decision #2: Planningfor Retirement

Tom andTricia are 22, newly married, and ready to embark on the journey of life. They both plan to retire 45 years fromtoday. Because their budget seems tight rightnow, they had been thinking that they would wait at least 10 years and thenstart investing $2400 per year to prepare for retirement. Triciajust told Tom, though, that she had heard that they would actually have moremoney the day they retire if they put $2400 per year away for the next 10 years- and then simply let that money sit for the next 35 years without anyadditional payments – then they would have MORE when they retired than if theywaited 10 years to start investing for retirement and then made yearly paymentsfor 35 years (as they originally planned to do). Pleasehelp Tom and Tricia make an informed decision:

Assumethat all payments are made at the END a year (or month), and that the rate ofreturn on all yearly investments will be 7.5% annually.

(Please do NOT ROUND when entering “Rates”for any of the questions below)

a) How much money will Tom and Tricia have in 45years if they do nothing for the next10 years, then put $2400 per year away for the remaining 35 years?

b) How much money will Tom and Tricia have in 10years if they put $2400 per year away for the next 10 years?

b2) How much will the amount you just computedgrow to if it remains invested for the remaining

35 years, but without anyadditional yearly deposits being made?

c) Howmuch money will Tom and Tricia have in 45 years if they put $2400 per year awayfor each of the next 45 years?

d) How much money will Tom and Tricia have in 45years if they put away $200 per MONTH at the end of each month forthe next 45 years? (Remember to adjust 7.5% annualrate to a Rate per month!)

If Tom and Tricia wait 25 years (after the kidsare raised!) before they put anything away for retirement, how much will they have to put away atthe end of each year for 20years in order to have $800,000 saved up on the first day of their retirement45 years from t