QUESTION 11
An investment advertisement boasts you can double your money. If the interest rate is 7.2%, how long would it take?
Question 12
SCENARIO: You were working for Rolling Hills when you became injured on the job. The Rolling Hills Company offers you one of three settlement options to choose from. Which would you choose if the discount rate were 6%? Option 1: $400,000 today Option 2: $60,000 each year for the next 10 years, or Option 3: $600,000 in 10 years
Provide the answer for OPTION 1 (in this format x,xxx.xx)
Provide the answer for OPTION 2 (in this format x,xxx.xx)
Provide the answer for OPTION 3 (in this format x,xxx.xx)
Provide the answer for WHICH WOULD YOU CHOOSE (WRITE: 1, 2, or 3)
Question 11
Let X be the amount invested
Future value = Present value * (1+ rate per period)^ no. of periods
2X = X * 1.072^n
1.072^n = 2
n = log 2 /log 1.072
= 0.30102999566/0.03019478535
= 9.97 years
= 10 years
or using rule 72
time to double the money = 72/Discount rate
= 72/7.2
= 10 years
Question 12
Present Value of Option 1 = 400,000
Present Value of Option 2 = Present value of Annuity = A*[(1-(1+r)^{-n})/r]
Where
A - Annuity payment = 60000
r - rate per period = 6%
n - no. of periods = 10
Present Value of Option 2 = 60000*[(1-(1.06)^-10)/.06]
= 60000*7.36008705141
= $441,605.22
Present Value of Option 3 = Present value = Future value / (1+ rate per period)^ no. of periods
= 600000/1.06^10
= 600000/1.79084769654
= $335,036.87
Decision : Option 2 is preferable as it has high PV.
Get Answers For Free
Most questions answered within 1 hours.