Answer Part A, B, B(i), B(ii), C of this textbook question that deals with the application of Time Value of Money (a) You have won a lottery worth $1,000,000. The amount will be paid to you in equal installments over 20 years. If the interest rate is 10% compounded annually, how much will you be paid at the end of each year? b) You are planning to buy a car worth $20,000. Which of the two deals described below would you choose, both with a 48-month term? (NB: estimate the monthly payment of each offer). i) the dealer offers to take 10% off the price, then lend you the balance at an annual percentage rate (APR) of 9%, monthly compounding. ii) the dealer offers to lend you $20,000 (i.e. no discount) at an APR of 3%, monthly compounding. (C) You have just joined the investment banking firm of Todd & Co. They have offered you two different salary arrangements. You can have $75,000 per year for the next two years, or you can have $55,000 per year for the next two years, along with a $30,000 signing bonus today. If the interest rate is 12% compounded monthly, which is a better offer? NB: first convert the annual percentage rate of 12% to EAR and use the EAR as the discount rate.
Answer Part A, B, B(i), B(ii), C of this textbook question that deals with the application of
(a) You have won a lottery worth $1,000,000. The amount will be paid to you in equal installments
over 20 years. If the interest rate is 10% compounded annually, how much will you be paid at
the end of each year?
b) You are planning to buy a car worth $20,000. Which of the two deals described below would
you choose, both with a 48-month term? (NB: estimate the monthly payment of each offer).
i) the dealer offers to take 10% off the price, then lend you the balance at an annual
percentage rate (APR) of 9%, monthly compounding.
ii) the dealer offers to lend you $20,000 (i.e. no discount) at an APR of 3%, monthly
compounding.
(C) You have just joined the investment banking firm of Todd & Co. They have offered you two
different salary arrangements. You can have $75,000 per year for the next two years, or you
can have $55,000 per year for the next two years, along with a $30,000 signing bonus today.
If the interest rate is 12% compounded monthly, which is a better offer? NB: first convert the
annual percentage rate of 12% to EAR and use the EAR as the discount rate.
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