Question

# You will receive the following cash payments as a retirement settlement: Year 0 1 2 3...

You will receive the following cash payments as a retirement settlement: Year 0 1 2 3 4 Amount \$10,000 \$20,000 \$50,000 \$50,000 \$75,000 In place of the above you are offered a check today for \$182,000. Assuming an interest rate of 4%, which would you choose? If an interest rate of 5% was used would this change your selection? Explain.

You are offered a choice as follows: \$10,000 per year for 10 years or an amount today of \$69,000. Assuming an interest rate of 7%, which should you choose?

You purchased an autographed basketball signed by Larry Bird for \$1,000. The ball increased in value by 10% per year for 10 years. The next 15 years it increased at a rate of 15%. What is that ball now worth?

Ans 1:

Offer 1

 Year 0 1 2 3 4 Total a Cash inflow 10000 20000 50000 50000 75000 b PV Factor @ 4% 1 0.9615 0.9246 0.889 0.8548 c PV Factor @ 5% 1 0.9524 0.907 0.8638 0.8227 (a*b) PV @ 4% 10000 19230 46230 44450 64110 184020 (a*c) PV @ 5% 10000 19048 45350 43190 61702.5 179290.5

If interest rate is 4% then \$ 182000 today should be accepted because present value of offer 1 are more i.e 184020.

If interest rate is 5% then \$ 182000 today should be accepted because the present value of offer 1 is less i.e 179290.50

Ans 2 :

Offer 1- \$10000 per year for 10 years

Present value of the offer = \$10000 X PVAF(7%,10)

=\$10000 X 7.02358

=\$ 70235.80

Offer 2 - \$ 69000 Today

Present value of the offer = 69000

Offer 1 should be accepted as it has a hgher PV.

Ans 3 :

Worth of the ball today = \$ 1000 X PVAF(10%,10) X PVAF(15%,15)

= \$1000 X 6.1444 x 5.8474

= \$35928.76

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