Time Value Of Money

Answer all of the following questions. For each answer, show your work to get full points (stating the answer alone is not sufficient).

1. Select a userid/password and join group MGF301UB (password = mgf301ub) at Stocksquest.com. Details are attached to this assignment. Invest at least $90,000 total of your $100,000 portfolio in any number of stocks from 1 to 10. Turn in your userid and a printout (or summary) of your stock selections with this assignment.

See Attatchments

2. Your uncle died last year and left you money in his will. You are to receive $50,000 in four years (i.e., in time 4).

(a) What is the value of the inheritance today (in time 0) if the appropriate discount rate is 6% and you compound annually?

PV = (future payment)/(1+r)t

PV = (50,000)/(1+.06)4

PV = $39,604.68

(b) If you invest the money when you receive it in time 4, how much will it grow to 20 years from today (i.e., in time 20) if you earn 6% each year?

FV = PV * (1+r)t

FV = (50,000/(1+r)t) * (1+r)t

FV = (50,000/(1+.06)4) * (1+.06)20

FV = $127,017.58

3. Your neighbor is buying a new recreational vehicle (RV). If he buys the RV for cash, the price is $32,000. Alternatively, he could buy the RV for monthly payments of $645 at the end of each month for 60 months. At what discount rate, will the two options be equally attractive (using monthly compounding)?

PV = C [(1/r) - (1/(r (1 + r)t)]

32,000 = 645 [(1/r) - (1/(r(1 + r)60)]

Used Microsoft Excel Payment Function

=PMT(0.006457,60,32000) PMT = 645.00

Monthly Rate = 0.6457%

4.

(a) If you will be making equal deposits into a retirement account for 5 years (with each payment at the end of the year), how much must you deposit each year if the account earns 7% compounded annually and you wish to have $100,000 after 30 years?

PV = (FV)/(1+r)t