Reference no: EM132972223

Brief: You have been employed to provide a comprehensive analysis and discussion on a number of investment scenarios provided by your client. As the client has little knowledge of finance, it is your responsibility to provide the theoretical and mathematical calculations for the investment(s) they provide and the theoretical questions they pose.

Background: Your client, whom you are writing the report for, is a nurse by profession. She has two children - aged 7 and 5, with a steady income. Her knowledge of financial theory and financial mathematics is almost nonexistent. She (and her partner) is in a position to invest into sound investments for both short-term and long-term returns. She has done some research and has found a number of investments that she wishes to have analysed. As such, you do not have to search for viable investments for her. You also note that she wishes to invest into securities for retirement, with only the viability of the investment(s) should be considered in this report. Lastly, as we do not know her (and her partners) financial position, it is impossible to know how many of these investments they can purchase / invest. Therefore, you are expected to provide advice on each investment in isolation from the other investments, i.e. not as a portfolio of investments.

Clients Investments:

Problem 1. Your client has just won a magazine lottery and has the choice between three alternatives. She can get $100,000 now, or $10,000 per year in perpetuity, or $50,000 now and $150,000 at the end of 10 years. If the appropriate discount rate is 12% per annum, which option should your client choose?

Problem 2. Your client would like to have $15,000 in 15 years' time for a luxury holiday with her husband to celebrate their silver anniversary (25th wedding anniversary). If she has an opportunity cost of 10% per annum, compounded semi-annually, how much does she need to invest each year to have $15,000 accumulated in 15 years?

Problem 3. Your client is planning to deposit $10,000 today into a bank account. Five years from today she expects to withdraw $7,500. If the account pays 5% interest per year how much will remain in the account eight years from today?

Problem 4. Two annuities are available for purchase that your client has identified. The first annuity pays $2,800 each month over a 5 year period at a nominal rate of 9% p.a. The second annuity pays $18,000 each six-month period, again over 5 years, at a nominal rate of 10% p.a., but has an annual fee of $1,000, paid at the beginning of each year. Identify which of the two annuities would be a better option for your client.

Problem 5. Your client's parents have a business with a loan of $5,000,000 repayable at the end of each year at a nominal rate of 9.5% p.a., compounded monthly. The business now wishes to contemplate converting to payments on a quarterly basis. The loan is for 5 years. Your client would like to know:

(a) What is the current annual payment on the loan?

(b) What will be the payment if the business switches to payments at the beginning of each quarter?