Question

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?

Answer #1

**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

You purchased an autographed basketball signed by Larry Bird for
$1,000. The ball increased in value by 10% per year for 10 years.
In the next 15 years, it increased at a rate of 15%. What is that
ball now worth?
How long would it take you to double an investment if you could
earn 8.5% annually?

You are offered a court settlement in the following terms: you
will receive 6 equal payments of $1,705 each every year, with the
first payment being made 3 years from now. The current annual
interest rate is 6%. Assume yearly compounding. What is this
settlement worth in present value terms?

You are offered a court settlement in the following terms: you
will receive 5 equal payments of $8,262 each every year, with the
first payment being made 3 years from now. The current annual
interest rate is 5%. Assume yearly compounding. What is this
settlement worth in present value terms?

You are offered the following cash flows by your company upon
retirement:
Year Amount
$50,000
60,000
70,000
80,000
90,000
You are offered a payment today of $270,000 in place of the
payments above. Assuming a 7% interest rate, which should you
take?

You are offered a court settlement in the following terms: you
will receive 7 equal payments of $765 each every year, with the
first payment being made 2 years from now. The current annual
interest rate is 3%. Assume yearly compounding. What is this
settlement worth in present value terms? Enter your answer in the
form of dollars, rounded to the nearest cent, and without the
dollar sign ('$').

If you are expecting a settlement of $10,000 at the end of each
year for five years, How much this annuity is worth today if the
interest rate is 8% ?

You are planning for your future needs and retirement. You want
to receive $10,000 ten years from today and a retirement annuity of
$50,000 per year for 15 years with the first payment 15 years from
today. To pay for this, you will make 5 payments of $A per year
beginning today and 4 annual payments of $2A with the first payment
13 years from today. With an interest rate of 8% what is the value
for A?

7. You are negotiating for the terms of a legal settlement, and
your opponent’s attorney has presented you with the following
alternative settlement alternatives:
a. $38,000 today in one lump sum.
b. $50,000 to be paid to you in five equal payments of $10,000
at the end of each of the next five years.
c. If your discount rate is 10%, what is the present value of
each of the alternatives and which alternative would you choose,
and why?

You want to receive $50,000 five years from today and a
retirement annuity of $100,000 per year for 25 years with the first
payment 10 years from today. To pay for this, you will make 5
payments of A per year beginning today and 10 annual payments of A
with the first payment 8 years from today. With an interest rate of
8%, what is the value for A?

You are investing $28,000 today and in return you will receive
$10,000 in a year and $X in 2 years and $15,000 in 3 years. If the
interest rate is 10% per year then what it minimum value of $X that
you will accept.

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