Reference no: EM133004929
1). A Vancouver home renovation firm has quoted a price of $9,800 to fix Mike's back yard.
Five years ago, Mike left $7,500 in an account that has earned an average of 5.25% per year.
Does Mike have enough money in that account for the back yard fix-up? Please show and explain the calculations.
2). In 1867, the US Secretary of State purchased Alaska from Russia for $7,200,000 (about two cents per acre).
At the time, the deal was considered a folly (i.e. crazy) but from our perspective today, did the US Secretary of State get a bargain?
What would it cost in 2007 if Alaska was in exactly the same condition as it was 140 years before and the prevailing interest rate over the 140 years was 4%.
Please show and explain the calculations.
3). Bob, a university student, needs to borrow $5,000 for his tuition bill. He agrees to pay back the loan in one lump-sum payment five years from from now, after he is out of school. The bank says that the payment has to be $7,012.76 If Bob borrows the $5,000 from the bank, what interest rate is he paying on his loan? Please show and explain the calculations.
4). Jack and Jill determined that upon retirement they will need to withdraw $50,000 annually, at the end of each year for the rest of the next 30 years. They know that they can earn 4% each year on their investment.
How much need Jack and Jill in their retirement account ( at the beginning of their retirement) to generate this future cash flow?
Please show and explain your calculations.
Hint: What is the present value of this annuity?
Mini Case:
Joe Blue is not a big financial expert, but on April 3, 2002, the self-employed appliance repairman did the financial news!
Joe was the sole winner of an advertised $48 million BC Lottery game.
Joe had a choice of one of two payoff optins:
- either a lump-sum payment upfront or
- an annuity over 25 years.
Joe Blue accepted a lump-sum payment of $26,072,769 pre-tax, in full settlement of the $48 million advertised pot.
The annuity alternative was equal annual payments of $1,920,000 pre-tax, over 25 years.
a). Did Joe Blue make a sound financial decision as to how he should receive his winnings?
b). Should he have taken the stream of payments instead of the lump sum?
c). Please detail your logic in writing and show your calculations.