Developing Financial Insight

Solution:

1. Savings = $15,000

Cost of the trip = $25,000 Rate of return = 0.08

a) Future Values: FV = PV(1 + r)t

Future Value of $15,000 = $15,000 * ( 1 + 0.8)5

$15,000 * 1.469

= $22,035 Difference = -$2965

The money in my account will not be sufficient to take the trip on my 40th birthday, as there will be a Difference of -$2965. I will require additional $2965 to meet the expected cost of $25,000.

b) Future Value of C invested at r percent for t periods: FV = C * (1+r)t Future value of the cash amount invested at 8% interest for five years:

500 * 5.867 = 2,933.5

Total amount = $22,035 + 2,933.5 = $24,968.5

The total cash amount in my account on my 40th birthday will be $24,968.5. Thus I will not be able to take the trip on my 40th birthday as the cash amount in my account will not meet the expected cost of $25,000 by $31.5.

2. SingleandfinalPaymentafterfouryears=$50million Time = 4 years

Rate of return = 0.18

a) Present Values: PV = FV / (1 + r)t

Present value of $50 million: $50,000,000 / (1 + 0.18)4

$50,000,000 * 0.516 = $25,800,000



I will accept an amount of $25,800,000 today instead of $50,000,000 in four years.

b) Four- yearly receipt that I will be willing to accept: $25,800,000 / 2.690 = $9,591,078.067

Total Cash amount = $9,591,078.067

3. Cashamount=$40,000 Time = 12 years Interest rate = 0.10

Present Value of C to be received in t periods at r percent per period: PV = C / (1+r)t

Present value of cash amount to be received in next 12 years at 10% interest:

$40,000 * 6.814

Total cash amount = $272,560

The maximum price I would be paying today is $272,560.

a) Cash amount = $48,000 Time = 10 year.

Present