## Question

###### BUSI 320 Comprehensive Problem 3 Spring 2020 Use what you have learned about the time value...

**BUSI 320 Comprehensive Problem 3 Spring 2020**

Use what you have learned about the time value of money to analyze each of the following decisions:

**Decision #1: Which set of Cash Flows is worth more now?**

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

**Option A: Receive a one-time gift of $10,000 today. **

**Option B: Receive a $1600 gift each year for the next 10 years. The first $1600 would be**

** received 1 year from today. **

**Option C: Receive a one-time gift of $20,000 10 years from today.**

*Compute the Present Value of each of these options if you expect the interest rate to be 2% annually for the next 10 years. Which of these options does financial theory suggest you should choose?*

** Option A would be worth $10,000 today.**

** Option B would be worth $__________ today.**

** Option C would be worth $__________ today.**

** Financial theory supports choosing Option _______**

** **

*Compute the Present Value of each of these options if you expect the interest rate to be 5% 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 _______**

*Compute the Present Value of each of these options if you expect to be able to earn 8% 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 _______**

**Decision #2 begins at the top of page 2!**

**Decision #2: Planning for Retirement**

Todd and Jessalyn are 25, newly married, and ready to embark on the journey of life. They both plan to retire 45 years from today. Because their budget seems tight right now, they had been thinking that they would wait at least 10 years and then start investing $2400 per year to prepare for retirement. Jessalyn just told Todd, though, that she had heard that they would actually have more money 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 any additional payments - than they would have if they waited 10 years to start investing for retirement and then made yearly payments for 35 years (as they originally planned to do).

Please help Todd and Jessalyn make an informed decision:

*Assume that all payments are made at the end of a year, and that the rate of return on all yearly investments will be 8.4% annually*.

- How much money will Todd and Jessalyn have in 45 years if they do nothing for the next 10 years, then puts $2400 per year away for the remaining 35 years?

- How much money will Todd and Jessalyn have in 10 years if they put $2400 per year away for the next 10 years?

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

35 years, but without any additional yearly deposits being made?

- How much money will Todd and Jessalyn have in 45 years if they put $2400 per year away for each of the next 45 years?

- How much money will Todd and Jessalyn have in 45 years if they put away $200
at the*per MONTH***end**of each month for the next 45 years? (*Remember to adjust the 8.4% annual rate to a Rate per month!) (Round this rate per month to 5 places past the decimal)*

* example of rounding: .062134 = .06213 or 6.213%*

- If Todd and Jessalyn wait 25 years (after the kids are raised!) before they put anything away for retirement, how much will they have to put away
for 20 years in order to have $1,000,000 saved up on the first day of their retirement 45 years from today?*at the end of**each year*

## Answers

As HOMEWORKLIB instructions, only one question upto 4 subparts can be answered, here is the answer for Decision 1) so please understand and provide your like. please post the second question seperately, so that we can answer

Decision 1) Option A) 10000 Option b) Year Present value Factor @ 2% Present value of 1600 1 0.980392157 1568.627451 2 0.961168781 1537.87005 3 0.942322335 1507.715735 4 0.923845426 1478.152682 5 0.90573081 1449.169296 6 0.887971382 1420.754211 7 0.870560179 1392.896286 8 0.853490371 1365.584594 9 0.836755266 1338.808425 10 0.8203483 1312.55728 14372.13601Option B 14372.13601 Option c) Present value Factor @ 2% after 10th years 0.8203483 20000 16406.966Financial theory supports choosing option c) If interest rate 5% Option A) 10000 Option b) Year Present value Factor @ 5% Present value of 1600 1 0.952380952 1523.809524 2 0.907029478 1451.247166 3 0.863837599 1382.140158 4 0.822702475 1316.32396 5 0.783526166 1253.641866 6 0.746215397 1193.944635 7 0.71068133 1137.090128 8 0.676839362 1082.942979 9 0.644608916 1031.374266 10 0.613913254 982.2612057 12354.77589Option B 12354.77589 Option c) Present value Factor @ 2% after 10th years 0.613913254 20000 12278.26507Financial theory supports choosing option b) If interest rate 8% Option A) 10000 Option b) Year Present value Factor @ 8% Present value of 1600 1 0.925925926 1481.481481 2 0.85733882 1371.742112 3 0.793832241 1270.131586 4 0.735029853 1176.047764 5 0.680583197 1088.933115 6 0.630169627 1008.271403 7 0.583490395 933.5846324 8 0.540268885 864.4302152 9 0.500248967 800.3983474 10 0.463193488 741.1095809 10736.13024Option B 10736.13024 Option c) Present value Factor @ 2% after 10th years 0.463193488 20000 9263.869762Financial theory supports choosing option b)