# Time Value of Money

1. John Smith has received a $1,000,000 gift from his grandmother. Below are two alternatives for investment. Calculate the current value of each. Which investment should John choose and why?

A. Invest in a one year government security yielding 5%.

B. Invest in real estate with some risk. John has found a piece of property for $1,000,000 that is forecasted to be worth $1,100,000 after one year.

2. Tom Jones is 65 years of age and has a life expectancy of 12 more years. He wishes to invest $20,000 in an annuity that will make a level payment at the end of each year until his death. If the interest rate is 8%, what income can Mr. Jones expect to receive each year?

3. Evaluate the three investment opportunities for bonus of $1,000 you just received. Find the values at 1 year, 5 years, and 20 years. Indicate which opportunity is the best for each of time periods.

A. An account paying 12% interest compounded annually.

B. An account paying 11% interest compounded semi-annually.

C. An investment that will pay you 14% annual interest only at the end of the investment period. of 1 year, 5 years, or 20 years.

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1. John Smith has received a $1,000,000 gift from his grandmother. Below are two alternatives for investment. Calculate the current value of each. Which investment should John choose and why?

A. Invest in a one year government security yielding 5%.

Return= 5%

B. Invest in real estate with some risk. John has found a piece of property for $1,000,000 that is forecasted to be worth $1,100,000 after one year.

Return= 10% = ($1,100,000 / $1,000,000)-1

John can choose either of the two investments depending on his risk tolerance.

If he wants a less risky investment, he can choose a government security that has a lower return.

If he can tolerate risk, he can choose real estate. He will be rewarded by a higher return (10%) for taking this risky investment.

2. Tom Jones is 65 years of age and has ...

#### Solution Summary

The expert evaluates investments and calculates the value of annuity. The real estate with some risks invested are determined.