Reference no: EM132997039

Question - Albert Einstein reportedly said, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." Regardless of whether Einstein uttered these exact words, the essence of his statement is still immensely powerful and cannot be disputed. For anyone who wants to build lasting wealth, understanding and harnessing the power of compound interest is essential. For the more visual of you, imagine, if you will, building the bottom part of a snowman. It starts with a snowball (or initial investment). You roll it around in the snow and it slowly gets bigger (interest on the investment). A slow and monotonous process until something wonderful becomes apparent - the snowball not only gets bigger and bigger, but at a faster and faster rate (interest on the interest).

Your friend, Mike Szyslak wants be a millionaire, and he found several ways applicable. But he is still hesitating among the various options and comes to you for financial advice. Complete each of the options, below, with your group.

Option 1: He is considering to buy Mega Millions lottery using his $65,000 deposit in the saving account. If the current federal tax rate on earnings of lottery is 25%, and the state tax is 8.82%, and he won one million on a lottery in Florida. How much can he get after tax if the payout was a lump sum? What is the amount per year over a 30-year period if the payout was an annuity? Assume his required rate of return is 5%, what will be the future values of the lump sum option and the annuity option in 30 years, respectively?

Option 2: His uncle promised to invest his business $100,000 per year over the next 15 years at the beginning of each year, and the required rates over next 15 years are expected be 4% per annual. Can you help him know what is the present value of such an investment? What if the annual rate of expected return is 6%?

Option 3: He considers saving money to become a millionaire. Starting at age 20, every night Mike takes $5 out of your pocket and put it in a manila envelope. At the end of the year, he takes the money from the envelope and invests in a stock fund with an average annual yield of 10%. Will the amount he has in the account ensure him a millionaire when you retire at age 65? What if he starts saving at age 40?

Option 4: He sets aside $50,000 into a saving account now, and will deposit $50,000 into the account at the beginning of each year for next 15 years. If the interest rate is 10% per annual, Will he become a millionaire in 15 years?

Option 5: Mike considers to buy 1,000 bonds. The bond is semi-annual coupon bond with 10-year maturity, the par value is $1,000 per bond with a 10% annual coupon rate. How much does it cost now if the annual yield to maturity is 10%? What would be the value of the bond if, just after it had been issued, the expected inflation rate rose by 2%? What would be the bond's value if inflation fell, and required rate of return declined to 8 percent?

Option 6: Mike would like to know how much money he should invest annually in order to have $1,000,000 in 15 years. He assumes that he can earn 10% interest per year and the investment was made at the beginning of each year. What if the interest rate is compounded continuously?

Option 7: If Mike is a millionaire today, how long will it take for his money to double if it is desired interest rate is 12% per year compounded semi-annually?

Option 8: Mike requires a 6% annual return on his business investments. Assume he will receive $200,000, $300,000, $400,000 and $500,000 respectively for the next four years on a particular investment. What is the most he would be willing to pay for this investment?

Option 9: Mike plans to purchase a house and loan amount is one million with 30 years fixed rate of 5%. What will be his monthly mortgage? What will be his interest cost for the first month of the second year?

Option 10: Mike starts saving money for his son to pay for his college. Hi son is 2 years old now and he is expected to go to a four year college at age 18. The current college tuition cost is $30,000 per year, and tuition is expected to grow at a constant rate of 3% annually. He plans to save $5000 at the beginning of each year during next 16 years. What would be his expected rate of return so that he can have enough money pay for his son's 4 year college tuition?