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55.
Imprudential, Inc. has an unfunded pension liability of $850 million that
must be paid in 25 years. To assess the value of the firm's stock, financial
analysts want to discount this liability back to the present. The relevant
discount rate is 6.5 percent. What is the present value of this liability?
56.
You have just received notification that you have won the $1.4 million first
prize in the Centennial Lottery. However, the prize will be awarded on your
100th birthday, 78 years from now. The appropriate discount rate is 8
percent. What is the present value of your winnings?
57.
Your coin collection contains fifty-four 1941 silver dollars. Your
grandparents purchased them for their face value when they were new.
These coins have appreciated at a 10 percent annual rate. How much will
your collection be worth when you retire in 2060?
58.
In 1895, the winner of a competition was paid $150. In 2006, the winner's
prize was $70,000. What will the winner's prize be in 2040 if the prize
continues increasing at the same rate?
59.
Suppose that the first comic book of a classic series was sold in 1954. In
2000, the estimated price for this comic book in good condition was about
$340,000. This represented a return of 27 percent per year. For this to be
true, what was the original price of the comic book in 1954?
60.
Suppose you are committed to owning a $140,000 Ferrari. You believe your
mutual fund can achieve an annual rate of return of 8 percent and you want
to buy the car in 7 years. How much must you invest today to fund this
purchase assuming the price of the car remains constant?
61.
You have just made a $1,500 contribution to your individual retirement
account. Assume you earn a 12 percent rate of return and make no
additional contributions. How much more will your account be worth when
you retire in 25 years than it would be if you waited another 10 years before
making this contribution?
62.
You are scheduled to receive $30,000 in two years. When you receive it, you
will invest it for 5 more years, at 6 percent per year. How much money will
you have 7 years from now?
63.
You expect to receive $9,000 at graduation in 2 years. You plan on investing
this money at 10 percent until you have $60,000. How many years will it be
until this occurs?
Essay Questions
64.
You want to deposit sufficient money today into a savings account so that
you will have $1,000 in the account three years from today. Explain why you
could deposit less money today if you could earn 3.5 percent interest rather
than 3 percent interest.
65.
You are considering two separate investments. Both investments pay 7
percent interest. Investment A pays simple interest and Investment B pays
compound interest. Which investment should you choose, and why, if you
plan on investing for a period of 5 years?
66.
What lesson does the future value formula provide for young workers who
are looking ahead to retiring some day?
67.
You are considering two lottery payment options: Option A pays $10,000
today and Option B pays $20,000 at the end of ten years. Assume you can
earn 6 percent on your savings. Which option will you choose if you base
your decision on present values? Which option will you choose if you base
your decision on future values? Explain why your answers are either the
same or different.
68.
At an interest rate of 10 percent and using the Rule of 72, how long will it
take to double the value of a lump sum invested today? How long will it take
after that until the account grows to four times the initial investment? Given
the power of compounding, shouldn't it take less time for the money to
double the second time?
