Question

QUESTION 11

1. 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)

Answer 1

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.