Question

1. YOUR AUNT HAD AGREED TO GIVE YOU A GIFT. She is going to give you a choice in how you may collect your gift. You may take $10,000 payable at the end of each year for 10 years ( for a gift sum of 100,000). Alternatively you may select an option provides you with your gift right in cash. If you accept a 6% rate of return as an appropriate rate of return, how much will you receive today if you take the cash rather than the annual payments?

2. Congratulations, you have just graduated and accepted an offer from well known corporation - make a lot a mony inc. You also have a new daughter. You would like to save some money from your new big salary in order to have 50,000 for your daughter to use for college in 18 yrs. If you can earn 9% on your money, how much do you have to put away ?

3. You are the new manager of a new department at a major bank. As part of your job, you must estimate the rate of inflation to be included in your banks estimates of rates to charge on loans. If your current estimate of inflation is 3.1% per month, what is your estimate of the compound annual rate of inflation.

Answer 1

4 1 Rate Annual payment PV 10000 73600.87 2 FV period rate PV 18 12 10599.69 3 Monthly inflation 3.10% 44.25% compound annual rate of inflation. 16 I

4 1 Rate 0.06 10000 -PV (D5,10,-D6) Annual payment PV 2 FV 10 period rate PV 18 0.09 -PV(D11,D10,0,-D9) 12 13 Monthly inflation compound annual rate of inflation 0.031 (1+D14)A12-1 16 17