Purchase Solution

Time Value of Money

Not what you're looking for?

Ask Custom Question

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.

Purchase this Solution

Solution Summary

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

Solution Preview

Please see attached file.

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 ...

Purchase this Solution


Free BrainMass Quizzes
Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.