Reference no: EM133079721

Problem 1 - Present and Future Values for Different Interest Rates. Find the following values. Compounding/ discounting occurs annually.

1. An initial $500 compounded for 10 years at 6%.

2. An initial $500 compounded for 10 years at 12%.

3. The present value of $500 due in 10 years at 6%.

4. The present value of $1,552.90 due in 10 years at 12% and 6%.

Problem 2 - Evaluating Lump Sums and Annuities. Jimmie just won the lottery and she must choose between three awards options. She can elect to receive a lump sum today of $61 million to receive 10 end-of-year payments of $9.5 million, or to receive 30 end-of-year payments of $5.5 million.

1. If she thinks she can earn 7% annually, which should she choose?

2. If she expects to earn 8% annually, which is the best choice?

3. If she expects to earn 9% annually, which option would you recommend?

4. Explain how interest rates influence the optimal choice.