Question 1

Assuming that you had just won $5,000,000 in the lottery, describe the advantages and disadvantages of receiving a lump sum today versus a ten-year annuity. Discuss other factors that are relevant or needed to make this decision. No interest rate is given, but different interest rates can be assumed, if necessary, to answer this problem.

Accepted Answer

The answer of Assuming that you had just won $5,000,000...

Question 2

You have set a $100,000 goal for a college fund for your newborn child. You plan on having a fixed amount taken from your salary each month to meet this goal. The calculation to determine the monthly amount is called

Accepted Answer

The calculation to determine the monthly amount needed to meet a future financial goal, like a $100,000 college fund, by making fixed payments is known as the future value of an annuity. This concept applies when you want to find out how much money you will accumulate over time by making regular, fixed payments into an account that earns interest.

Question 3

To compute how much you would need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years, you would need to use

Accepted Answer

To compute how much you need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years, you need to consider both the future value of the annuity (to accumulate the savings over the 25 years) and the present value of the annuity (to determine the amount needed today to ensure the 30 years of withdrawals). This involves understanding how much your savings will grow over the saving period and how much capital you need at the beginning of the withdrawal period to sustain the withdrawals.

Question 4

To determine how much money you would need to save today to withdraw $10,000 a year for five years, you would use the present value of an annuity tables.

Accepted Answer

The present value of an annuity table helps in calculating the amount of money one needs to invest today to be able to withdraw a fixed amount annually for a certain period of time, making it applicable for determining how much to save today to withdraw $10,000 a year for five years.

Question 5

It is always better to choose a lump sum rather than to choose periodic payments over time. This is why nearly all lottery winners choose the lump-sum payment.

Accepted Answer

The better choice between a lump sum and periodic payments depends on individual circumstances, including financial situation, investment knowledge, spending habits, and tax implications. Some lottery winners choose periodic payments to ensure a steady income over time and to reduce the risk of spending all the money quickly.

Question 6

Yogi Berra Jr. has agreed to play for the New York Mets for $4 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?

Accepted Answer

To calculate the value of this contract in today's dollars, you would use the "Present value of an annuity" table. This is because the contract involves a series of equal payments ($4 million per year) over a fixed period (10 years), which is the definition of an annuity. The present value calculation helps determine the current worth of those future payments.

Question 7

Using the Time Value of Money charts provided, answer the following question. (Note to Instructors: Provide the appropriate tables to students from Personal Finance, Seventh Edition, Appendix C: Financial Tables.) Jack is 35 years old and is planning to retire at age 65. Based on a variety of factors, he is planning a retirement of 20 years. Jack determines that he will need $20,000 per year during his 20 years of retirement. If he can invest at 9%, how much will he need to save each year beginning today to reach his goal?

Accepted Answer

To solve this, we use the present value of an annuity formula to find out how much Jack needs at the start of his retirement, and then use the future value of an annuity formula to determine how much he needs to save each year. Given a 9% investment rate, the amount he needs to save annually to reach his goal, considering both the accumulation phase (30 years until retirement) and the distribution phase (20 years of retirement), aligns with the calculations for option C.

Question 8

Assuming interest rates were 6% per annum, what would be the present value of the $50,000 per year for 30 years payment stream? Use the tables or a financial calculator.

Accepted Answer

The present value of a 30-year annuity of $50,000 at 6% interest is $688,242.

Question 9

Use the following two columns of items to answer the matching questions below:
-timelines

Accepted Answer

A) a factor multiplied by a periodic savings level (annuity) to get the present value of the annuity
The correct term for this description is "Present Value of an Annuity Factor." This factor is used in finance to determine the present value of a series of future annuity payments. The present value of an annuity factor is calculated based on the interest rate and the number of periods over which payments will be made. It is used to discount the future annuity payments to their equivalent value in today's dollars, taking into account the time value of money.

Question 10

To determine how much you would need to save each year to reach a specific goal, you would use

Accepted Answer

The future value of an annuity formula is used to calculate how much you would need to save each year to reach a specific financial goal, taking into account regular, equal payments and interest compounding.

Question 11

Which of the following decisions would involve the use of the present value of a $1 ordinary annuity table?

Accepted Answer

The present value of a $1 ordinary annuity table is used to determine the present value of a series of equal payments made at regular intervals, such as the $15,000 a year for 20 years option in choice B.

Question 12

Use the following two columns of items to answer the matching questions below:
-annuity due
A)a factor multiplied by a periodic savings level (annuity) to get the present value of the annuity
B)a series of equal payments that occur at the beginning of each period
C)diagrams that show payments over time

Accepted Answer

The answer of Use the following two columns of items...

Question 13

The present value of an annuity can be obtained by discounting the individual cash flows of the annuity and then summing the resulting present values.

Accepted Answer

The present value of an annuity is calculated by discounting each of the annuity's periodic cash flows back to their present value and then summing those present values. This process accounts for the time value of money, recognizing that a dollar received in the future is worth less than a dollar received today.

Question 14

You utilize present and future value concepts in investment, purchase, and retirement decisions.

Accepted Answer

Present and future value concepts are fundamental in making informed decisions regarding investments, purchases, and planning for retirement, as they help in evaluating the worth of cash flows at different points in time.

Question 15

You can afford to make monthly payments of $400 for 60 months to buy a new car. Assuming you can borrow at 6% per year interest, how would you figure out how much money you can borrow?

Accepted Answer

To determine how much money you can borrow based on a fixed monthly payment, interest rate, and loan term, you would use the present value of an annuity calculation. This formula considers the interest rate and the number of payments to calculate the total amount you can borrow today, given the amount you can afford to pay each month.

Question 16

Use the following two columns of items to answer the matching questions below:
-present value interest factor for an annuity
A)a factor multiplied by a periodic savings level (annuity) to get the present value of the annuity
B)a series of equal payments that occur at the beginning of each period
C)diagrams that show payments over time

Accepted Answer

The answer of Use the following two columns of items...

Question 17

Time value concepts can be applied to lottery winnings. The winner can usually choose an annuity or a lump sum.

Accepted Answer

The time value of money concept applies to lottery winnings because winners often have the choice between receiving their winnings as an annuity, which is spread out over a period of time, or as a lump sum, which is a one-time payment. The decision between these options involves considering the present value of the annuity payments compared to the lump sum.

Question 18

Present and future values concepts are applied in all of the following decisions, except

Accepted Answer

Annual cash inflows are typically considered in the context of budgeting and cash flow management rather than the application of present and future value concepts, which are more directly related to understanding the value of money over time in decisions like purchasing a home, planning for retirement, or saving for a large purchase.

Question 19

Lucky Louie just won the lottery! He has a choice of taking $1,000,000 in cash or receiving $50,000 per year for 30 years beginning at the end of this year. The best way to make this choice is to

Accepted Answer

Calculating the present value of the annuity payments allows Lucky Louie to compare the value of the annuity payments in today's dollars to the $1,000,000 cash option, taking into account the time value of money. This financial analysis helps in making an informed decision.

Question 20

The state lottery has just informed you that you have won $1 million to be paid out in the amount of $50,000 per year for the next 20 years. With a discount rate of 12%, what is the present value of your winnings?

Accepted Answer

The answer of The state lottery has just informed you...

Quiz 3: Applying Time Value Concepts