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Finman Enclass TVM Problemsrevised

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FINMAN ENCLASS EXERCISES ON TIME VALUE OF MONEY: 1.
You have been hired as a financial advisor to Stephen Curry. He has received two offers for playing professional basketball and wants to select the best offer, based on considerations of money only. Offer A is a $10m offer for $2m a year for 5 years. Offer B is a $11m offer of $1m a year for four years and $7m in year 5. What is your advice? (Hint: compare the present value of each contract by assuming a range of interest rate, say 8% - 14%) 2.
It is now December 31, 2011 (t=0), and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2010 accident. She requested recovery of lost wages plus $100,000 for pain and suffering plus $20,000 for legal expenses. Her doctor testified that she has been unable to work since the accident and that she will not be able to work in the future. She is now 62 and the jury decided that she would have worked for another 3 years. She was scheduled to have $34,000 in 2010. (To simplify this problem, assume that the entire annual salary amount would have been received on December 31, 2010.) Her employer testified that she probably would have received raises of 3% per year. The actual payment for the jury award will be made on December 31, 2012. The judge stipulated that all dollar amounts are to be adjusted to a present value basis on December 31, 2012, using a 7% annual interest rate and using compound, not simple interest. Furthermore, he stipulated that the pain and suffering and legal expenses should be based on a December 31, 2011, date? How large a check must the city write on December 1, 2012?
Rate YR 1 2 3 4 5
8% 9% 10% 11% 12% 13% 14%
A 2.00 2.00 2.00 2.00 2.00
7.99 7.78 7.58 7.39 7.21 7.03 6.87
B 1.00 1.00 1.00 1.00 7.00
8.08 7.79 7.52 7.26 7.01 6.77 6.55
Choice
B B A A A A A
12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 34000 35020 36070.6 37152.718 38267.29954 100000 date which payment 20000 shall be made 155020 step 1 Calculate for the salary amount from year 2010-2014 growth rate 3% 2010 34,000.00 2011 35,020.00 2012 36,070.60 2013 37,152.72 2014 38,267.30 step 2 Compound or discount the salaries, pain and suffering fees to the date of payment given: rate 7%
present value of all cf at yr 3 309,014.91
or cf 34,000.00 155,020.00 36,070.60 37,152.72 38,267.30 npv $252,248.21
npv compounded at year 3 309,014.91
3.
You are planning for retirement 34 years from now. You plan to invest $4,200 per year for the first 7 years, $6,900 per year for the next 11 years, and $14,500 per year for the following 16 years (assume all cash flows occur at the end of each year). If you believe you will earn an effective annual rate of return of 9.7%, what will your retirement investment be worth 34 years from now?
SO UT ON
4.
You plan to retire 33 years from now. You expect that you will live 27 years after retiring. You want to have enough money upon reaching retirement age to withdraw $180,000 from the account at the beginning of each year you expect to live, and yet still have $2,500,000 left in the account at the time of your expected death (60 years from now). You plan to accumulate the retirement fund by making equal annual deposits at the end of each year for the next 33 years. You expect that you will be able to earn 12% per year on your deposits. However, you only expect to earn 6% per year on your investment after
you retire since you will choose to place the money in less risky investments. What equal annual deposits must you make each year to reach your retirement goal? 5.
Susan is currently forty-five years old and is looking for retirement ten years from now. She aims to have a retirement plan that allows her to withdraw P 150,000.00 at the beginning of each year for the next fifteen years and still have a remaining balance of P 500,000.00 in the account. However, she only expects to earn 8% per year on her investment after she retire since she will choose to place the money in less risky investments. She currently has P 300,000.00 in an account which earns 10% annually. Her plan is to deposit 40% of her salary to the account at the end of the next 10 years (assuming she retires after receiving her salary for the tenth year). Her current salary is P 8
0,000.00 (40% of which she hasn’t deposited yet) and she expects an
increase of 3% for the first 3 years, 5% for the next 5 years, and 2% for the remaining 2 years. The
company’s policy allows managers, who worked with the company for twenty
-five years, to receive a retirement bonus in case the person decides to step down from his/her position. At present, Susan has been working for the company for fifteen years.
1solve for PV of the withdrawalsBEGINNINGn27r6%pmt180,000.00 fv2,500,000.00 pv?PV($3,038,989.79)2PV of the withdrawals will be the fv of the retirement plan3solve for the pmt of the retirment planENDn33r12%fv$3,038,989.79pv0pmt($8,874.79)60$2,500,000annual deposits at end of each year for 33 yearswithdrawals of $180,000 at the beg of each year for the next 27 years
6%12%
033

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